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Report to Congressional Committees: 

United States Government Accountability Office: 


October 2007: 

Financial Regulation: 

Industry Trends Continue to Challenge the Federal Regulatory Structure: 

Financial Regulation: 


GAO Highlights: 

Highlights of GAO-08-32, a report to congressional committees. 

Why GAO Did This Study: 

As the financial services industry has become increasingly concentrated 
in a number of large, internationally active firms offering an array of 
products and services, the adequacy of the U.S. financial regulatory 
system has been questioned. GAO has identified the need to modernize 
the financial regulatory system as a challenge to be addressed in the 
21st century. This report, mandated by the Financial Services 
Regulatory Relief Act of 2006, discusses (1) measurements of regulatory 
costs and benefits and efforts to avoid excessive regulatory burden, 
(2) the challenges posed to financial regulators by trends in the 
industry, and (3) options to enhance the efficiency and effectiveness 
of the federal financial regulatory structure. GAO convened a 
Comptroller General’s Forum (Forum) with supervisors and leading 
industry experts, reviewed regulatory agency policies, and summarized 
prior reports to meet these objectives. 

What GAO Found: 

The inherent problems of measuring the costs and benefits of regulation 
make it difficult to assess the extent to which regulations may be 
unduly burdensome to U.S. financial services firms, particularly in 
comparison to firms in other countries. Additionally, it is difficult 
to separate the costs of complying with regulation from other costs and 
thus determine regulatory burden. Regulatory agencies, however, have 
undertaken several initiatives to reduce regulatory burden; these 
efforts contributed to the Financial Services Regulatory Relief Act of 
2006. While noting that regulation contributes to confidence in 
financial institutions and markets, participants in the Forum agreed 
regulators have opportunities to further reduce regulatory burden and 
suggested regulators better measure the results of implemented 
regulations. GAO also recently recommended regulatory agencies consider 
whether and how to measure the performance of regulation during the 
process of promulgating the regulation and improving the communication 
of regulatory reviews to the public. 

The current regulatory structure, with multiple agencies that oversee 
segments of the financial services industry, is challenged by a number 
of industry trends. The development of large, complex, internationally 
active firms whose product offerings span the jurisdiction of several 
agencies creates the potential for inconsistent regulatory treatment of 
similar products, gaps in consumer and investor protection, or 
duplication among regulators. Regulatory agencies have made efforts to 
collaborate in responding to these trends and avoid inconsistencies, 
gaps, and duplication. However, challenges remain; until recently, the 
Office of Thrift Supervision and the Securities and Exchange 
Commission, for instance, had not sought to resolve potentially 
duplicative and inconsistent regulation of several financial services 
conglomerates for which both agencies have jurisdiction. Finally, 
despite the challenges posed by the industry’s dynamic environment, 
accountability for addressing issues that span agencies’ jurisdiction 
is not clearly assigned. These issues have led GAO to suggest in prior 
work that the federal regulatory structure should be modernized. 

GAO and others have recommended several options to accomplish 
modernization of the federal financial regulatory structure; these 
include consolidating certain regulatory functions as well as having a 
single regulator for large, complex firms. There also are potential 
lessons that can be learned from the experience of other nations that 
have restructured their financial regulators. Several Forum 
participants, for instance, suggested that one important lesson the 
United States could learn from the United Kingdom’s Financial Services 
Authority was the value of setting principles or goals for regulators. 
The Department of the Treasury’s recently announced plan to propose a 
restructured regulatory system provides an opportunity to take the 
first step toward modernization by providing clear and consistent goals 
for the regulatory agencies. 

What GAO Recommends: 

GAO does not make any new recommendations in this report, but observes 
that the recommendations and options presented in prior reports remain 
relevant today in considering how best to improve the federal financial 
regulatory structure. The Chairman of the Federal Reserve and the 
Chairman of the National Credit Union Administration provided formal 
comments generally agreeing with the thrust of our report. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-32]. For more information, contact Yvonne 
Jones at (202) 512-8678 or 

[End of section] 



Results in Brief: 


Measuring the Costs and Benefits of Regulation Has Been Difficult, 
Complicating Efforts to Reduce Regulatory Burden: 

Developments in a Dynamic Financial Industry Environment Pose 
Challenges to the Federal Financial Regulatory Structure: 

Options to Change the Federal Financial Regulatory Structure: 

Agency Comments and Our Evaluation: 

Appendix I: Participants in the June 11, 2007, Comptroller General's 

Appendix II: Comments from the Chairman of the Board of Governors of 
the Federal Reserve System: 

Appendix III: Comments from the Chairman of the National Credit Union 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 


Figure 1: Federal Supervisors for a Hypothetical Financial Holding 

Figure 2: Percent of Assets Held by Largest 25 Banks and Number of 
Active Banking Institutions, 1996-2006: 

Figure 3: Changes in Assets by Bank Charter, 1996-2006: 

Figure 4: Selected Legislation Resulting in Financial Regulatory 


AIM: Alternative Investment Market: 

BSA: Bank Secrecy Act: 

CEA: Commodity Exchange Act: 

CFTC: Commodity Futures Trading Commission: 

CRS: Congressional Research Service: 

CSE: consolidated supervised entity: 

EGRPRA: Economic Growth and Regulatory Paperwork Reduction Act of 1996: 

EU: European Union: 

FDIC: Federal Deposit Insurance Corporation: 

FDICIA: Federal Deposit Insurance Corporation Improvement Act: 

FINRA: Financial Industry Regulatory Authority: 

Forum: Comptroller General's Forum: 

FSA: United Kingdom - Financial Services Authority: 

Group: President's Working Group: 

ILC: industrial loan company: 

IMF: International Monetary Fund: 

LTCM: Long-Term Capital Management: 

NCUA: National Credit Union Administration: 

NPR: Notice of Proposed Rulemaking: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

SEC: Securities and Exchange Commission: 

SRO: self-regulatory organization: 

Treasury: Department of the Treasury: 

United States Government Accountability Office: 

Washington, DC 20548: 

October 12, 2007: 

The Honorable Christopher Dodd: 
The Honorable Richard Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: United States Senate: 

The Honorable Barney Frank: 
The Honorable Spencer Bachus: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The financial services industry--including the banking, securities, and 
futures sectors--has changed significantly over the last several 
decades.[Footnote 1] Firms today are generally fewer and larger, 
provide more and varied services, offer similar products, and operate 
in increasingly global markets. These developments have both benefits 
and risks for the overall U.S. economy. Despite these changes, the U.S. 
financial regulatory structure has largely remained the same. It is a 
complex system of multiple federal and state regulators as well as self-
regulatory organizations (SROs) that operate largely along functional 
lines, even as these lines have become increasingly blurred in the 
industry. Regulated financial institutions have learned to operate and 
thrive under the existing regulatory system. However, concerns about 
inefficient overlaps in responsibility, undue regulatory burden, and 
possible gaps in oversight raise questions about whether the current 
structure is best suited to meet the nation's needs. 

We identified a need to modernize the financial regulatory system as a 
challenge to be addressed in the 21st century, noting that although 
multiple specialized regulators bring critical skills to bear in their 
areas of expertise, they have difficulty identifying and responding to 
risks that cross industry lines.[Footnote 2] We asked whether it is 
time to modernize the financial regulatory system to promote a more 
coherent and integrated structure and specify goals more clearly. Such 
concerns also have been recently raised by the International Monetary 
Fund (IMF).[Footnote 3] In a statement regarding its review of U.S. 
economic developments, IMF concluded that rapid innovation in the U.S. 
financial industry had created new regulatory challenges for a system 
disadvantaged by its overlapping regulatory oversight. IMF stated that 
emphasis should be placed on strategies to improve regulatory 
effectiveness, such as implementing general regulatory principles or 
goals to ease interagency coordination and shorten reaction times to 
industry developments. Similarly, the Department of the Treasury has 
undertaken an initiative to examine the regulatory structure associated 
with financial institutions, partly in response to concerns that the 
current structure may make U.S. financial markets less competitive. 
Treasury expects to develop a plan by early 2008 to identify a 
regulatory structure with improved oversight, increased efficiency, 
reduced overlap, and the ability to adapt to financial market 
participants' constantly changing strategies and tools. 

Debate about modernizing the current financial regulatory structure is 
not new. However, there is continuing value in reexamining the current 
regulatory system and structure and considering ways in which it could 
be more efficient and effective. 

In response to a mandate in the Financial Services Regulatory Relief 
Act of 2006,[Footnote 4] this report: 

* describes measurements of the costs and benefits of financial 
regulation in general and current efforts to avoid excessive regulatory 
burden;[Footnote 5] 

* describes financial industry trends and the challenges that these 
pose to the federal financial regulatory structure; and: 

* discusses various options to enhance the efficiency and effectiveness 
of the federal financial regulatory structure. 

To meet our objectives, we convened a Comptroller General's Forum 
(Forum) on June 11, 2007, that brought together leading experts from 
the financial services industry, the regulatory agencies, and academia 
to discuss issues relative to our objectives. The Forum agenda covered 
three broad topics: (1) balancing regulatory costs and benefits, (2) 
financial services regulation in a dynamic environment, and (3) 
assessing options for enhancing the financial regulatory system. Forum 
participants were selected to provide perspectives from different 
segments of the industry and different regulatory agencies. To 
encourage a free exchange of information and viewpoints, no specific 
statements or opinions expressed by Forum participants are attributed 
to any participant. To meet our objectives, we also met with federal 
regulators to discuss our objectives and reviewed regulatory agency 
documents and reports. We also reviewed and summarized relevant 
analysis, conclusions, and recommendations from our earlier reports on 
financial regulation. (These reports are referenced in footnotes or 
noted in Related GAO Products at the end of this report.) We conducted 
our work between January 2007 and October 2007 in Chicago, Illinois, 
and Washington, D.C., in accordance with generally accepted government 
auditing standards. Appendix I provides a list of Forum participants. 

Results in Brief: 

Regulators and the financial services industry face challenges 
measuring regulatory costs and benefits, making it difficult to assess 
the extent to which regulations may be unduly burdensome to U.S. firms-
-particularly in comparison to the amount of regulation that firms face 
in other countries. Most notably, it is hard to separate the costs of 
complying with regulation from other costs. As a result, it is 
difficult for regulators to determine the extent that costs to 
implement rules impose regulatory burden and for the industry to 
substantiate claims about burdensome regulation. Measuring regulatory 
benefits remains an even greater challenge largely because of the 
difficulty in quantifying benefits such as improved consumer protection 
or financial stability, though regulators and other groups acknowledge 
that financial regulation provides such benefits as an increased 
confidence in our financial markets and an enhanced level of consumer 
protection. Nevertheless, regulators have responded to concerns about 
specific regulatory burdens, and many provisions of the Financial 
Services Regulatory Relief Act of 2006 are based on regulators' 
identification of regulations that are outdated or unnecessarily 
burdensome. However, some groups still assert that regulatory burden 
has increased significantly over time and that regulators should do 
more to address such burdens. Forum participants agreed with these 
assertions, suggesting that regulators improve measurements of 
implemented regulations' results as a way to promote their own 
regulatory accountability. Continued efforts such as those that the 
bank regulatory agencies undertook in response to the Economic Growth 
and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) could be 
important steps in identifying and eliminating outdated, unnecessary, 
and unduly burdensome regulations. We recently recommended several 
steps agencies should take to ensure they conduct effective and 
transparent reviews of regulations, including consideration of whether 
and how to measure the performance of a regulation during the process 
of promulgating the regulation and steps to improve the communication 
of regulatory reviews to the public. Further consideration of steps 
such as these could help ensure financial regulations are cost- 

The current regulatory structure--characterized by specialization and 
competition among regulators as well as charter choice--has contributed 
to broad and deep U.S. financial markets, but the agencies that share 
responsibility for financial regulation face continued challenges from 
financial trends including increased globalization, consolidation, and 
product convergence. In particular, the offering of similar financial 
products and services by firms subject to different regulatory regimes 
creates the potential for regulatory inconsistencies and regulatory 
gaps, among other issues. For example, in our prior work, we reported 
that holding companies of industrial loan companies (ILC) are overseen 
by regulators with different authority than holding companies of other 
depository institutions. As a result of differences in supervision, 
ILCs in a holding company structure may pose more risk of loss to the 
Deposit Insurance Fund than other types of insured depository 
institutions in a holding company structure. The Federal Deposit 
Insurance Corporation (FDIC), the regulator of ILCs, has placed a 
moratorium on applications for the ILC charter by commercial firms to 
allow it and Congress to further evaluate ILC ownership and its related 
issues. Similarly, we previously have reported that both the Office of 
Thrift Supervision (OTS) and the Securities and Exchange Commission 
(SEC) have jurisdiction over the holding companies of several large 
financial services firms, but had not resolved how to clarify 
accountability for the supervision of these firms, creating the 
potential for duplicative or inconsistent regulation. Regulators have 
made efforts to collaborate to respond to changes in the industry to 
avoid inconsistencies, gaps, and duplicative activities. OTS and SEC, 
for instance, have begun meeting to resolve the potential for 
duplicative or inconsistent regulation for the holding companies where 
they share jurisdiction. Also, the President's Working Group (Group) 
provides a framework for coordinating policies and actions that cross 
jurisdictional lines. However, we have reported that the Group is not 
well suited to orchestrate a consistent set of goals or objectives that 
would direct the work of the different agencies because it lacks the 
authority to bind members to its decisions or positions. While the 
regulatory agencies have taken actions to work collaboratively in 
response to the industry's trends, continued progress in these areas 
would help to make our existing regulatory structure more effective. 

In our prior work, we have recommended that Congress consider changes 
to the regulatory system to meet the challenges posed by the industry's 
trends and identified a number of options to accomplish this. Financial 
regulators today are increasingly dealing with large, complex firms 
that cross formerly distinct industry boundaries; however, the effects 
of the incremental development of our regulatory structure and the 
challenges that agencies face in responding to the dynamic industry 
environment are now more evident. The present federal financial 
regulatory structure, which has evolved largely as a result of periodic 
ad hoc responses to crises, continues to be challenged by the 
industry's trends of increased consolidation, conglomeration, 
convergence, and globalization. Today, financial services firms 
offering similar products may be subject to different regulatory 
regimes, creating the potential for inconsistent regulation. Many firms 
are subject to multiple regulators, creating the potential for 
regulatory duplication. At the same time, as our prior work has noted, 
no single agency has the responsibility and authority to identify and 
address risks that cross markets and industries. Thus, we and others 
previously have identified several options for consideration that, 
despite costs and risks, offer opportunities to enhance the efficiency 
and effectiveness of the regulatory system. We believe these options 
remain relevant today in considering how best to modernize the federal 
financial regulatory structure. Others also have proposed options for 
restructuring the federal financial regulatory system. Other nations 
have reorganized their regulatory systems; some have consolidated 
regulators into a single agency, while others have created specialized 
regulatory agencies that focus solely on ensuring the safety and 
soundness of institutions or on consumer protection. Lessons may be 
learned in this regard from the principles-based approach modeled by 
the United Kingdom, which consolidated several agencies into a single 
financial regulator, the Financial Services Authority (FSA). Some Forum 
participants noted that an important lesson from FSA's experience could 
be its development of clearly stated principles defining the 
regulator's priorities. Given the continued challenges faced by the 
current regulatory structure, establishing clear, consistent regulatory 
goals may be an important first step to improving its effectiveness. 

We are not making new recommendations in this report, but believe that 
our prior recommendations to enhance the effectiveness of the current 
regulatory process remain relevant. We also continue to believe that 
the options we presented in prior work for modifying the existing 
regulatory structure to better meet today's financial environment 
remain relevant. Finally, we and others also have stressed the 
importance of establishing clearer, more consistent goals for financial 
regulation. A critical first step to modernizing the regulatory system 
and enhancing its ability to meet the challenges of the dynamic 
financial services industry includes clearly defining regulatory 
agencies' goals and objectives. Such goals and objectives could help 
establish agency priorities as well as define responsibility and 
accountability for identifying risks, including those that cross 
markets and industries. No single financial regulator is currently in a 
position to set these goals, and current interagency groups have not 
proven themselves appropriate vehicles for goal setting. As Treasury 
considers how best to rationalize the U.S. financial regulatory 
structure, it has the opportunity to work with other agencies to define 
clear and consistent goals and objectives. Defining these goals could 
provide the impetus for making progress on the design of the financial 
regulatory system, and thus could be an important first step in the 
Secretary's plan to develop a more modern, efficient oversight 
structure that is better able to adapt to the industry's changes. 

We provided the Secretary of the Treasury and the heads of CFTC, the 
Federal Reserve, FDIC, NCUA, OCC, OTS, and SEC with drafts of this 
report for their comment. We received written comments from the 
Chairman of the Board of Governors of the Federal Reserve System and 
the Chairman of NCUA who generally agreed with the thrust of our 
report; these are reprinted in appendixes II and III. We also received 
technical comments from the staffs at the Treasury, the Federal 
Reserve, CFTC, FDIC, NCUA, OCC, OTS, and SEC that we have incorporated 
in the report. 


In the banking industry, the specific regulatory configuration depends 
on the type of charter the banking institution chooses. Bank charter 
types include: 

* commercial banks, which originally focused on the banking needs of 
businesses, but then over time broadened their services; 

* thrifts, which include savings banks, savings associations, and 
savings and loans, were originally created to serve the needs-- 
particularly the mortgage needs--of those not served by commercial 

* credit unions, which are member-owned cooperatives run by member- 
elected boards with a historic emphasis on serving people of modest 
means; and: 

* industrial loan companies (ILCs), also known as industrial banks, 
which are state-chartered financial institutions that have grown from 
small, limited-purpose institutions to a diverse industry that includes 
some of the nation's largest and more complex financial 
institutions.[Footnote 6] 

These charters may be obtained at the state or national level for all 
except ILCs, which are only chartered at the state level. State 
regulators charter institutions and participate in the oversight of 
those institutions; however, all of these institutions have a primary 
federal regulator if they offer federal deposit insurance. The primary 
federal regulators are the following: 

* The Office of the Comptroller of the Currency (OCC), which charters 
and supervises national banks. As of December 30, 2006, there were 
1,715 commercial banks with a national bank charter. These banks held 
the dominant share of bank assets, about $6.829 trillion. 

* The Federal Reserve, which serves as the regulator for state- 
chartered banks that opt to be members of the Federal Reserve System. 
As of December 30, 2006, the Federal Reserve supervised 902 state 
member banks, with total assets of $1.406 trillion. 

* The Federal Deposit Insurance Corporation (FDIC), which supervises 
all other state-chartered commercial banks with federally insured 
deposits, as well as federally insured state savings banks. As of 
December 30, 2006, there were 4,785 state-chartered banks and 435 state-
chartered savings banks, with $1.855 trillion and $306 billion in total 
assets, respectively. In addition, FDIC has certain backup supervisory 
authority for federally insured banks and savings institutions. 

* The Office of Thrift Supervision (OTS), which charters and supervises 
federally chartered savings institutions. As of December 30, 2006, OTS 
supervised 844 institutions with $1.464 trillion in total assets. 

* The National Credit Union Administration (NCUA), which charters and 
supervises federally chartered credit unions. As of December 30, 2006, 
8,362 credit unions hold $710 billion in assets. 

These federal regulators have established capital requirements for the 
depository institutions they supervise, conduct onsite examinations and 
offsite monitoring to assess an institution's financial condition, and 
monitor and enforce compliance with banking and consumer laws. 
Regulators also issue regulations, take enforcement actions, and close 
institutions they determine to be insolvent. 

The securities and futures industries are regulated under a combination 
of self-regulation (subject to oversight of the appropriate federal 
regulator) and direct oversight by the Securities and Exchange 
Commission (SEC) and the Commodity Futures Trading Commission (CFTC), 
respectively. In the securities industry, the self-regulatory 
organizations (SROs) have responsibility for oversight of the 
securities markets and their participants by establishing the standards 
under which their members conduct business; monitoring business 
conduct; and bringing disciplinary actions against their members for 
violating applicable federal statutes, SEC's rules, and their own 
rules.[Footnote 7] SEC oversees SROs by inspecting their operations and 
reviewing their rule proposals and appeals of final disciplinary 
proceedings. In the futures industry, SROs include the futures 
exchanges and the National Futures Association. Futures SROs are 
responsible for establishing and enforcing rules governing member 
conduct and trading; providing for the prevention of market 
manipulation, including monitoring trading activity; ensuring that 
futures industry professionals meet qualifications; and examining 
members for financial strength and other regulatory purposes. The 
Commodity Futures Trading Commission (CFTC) independently monitors, 
among other things, exchange trading activity, large trader positions, 
and certain market participants' financial conditions.[Footnote 8] 

The U.S. regulatory system for financial services is described as 
"functional" so that financial products or activities generally are 
regulated according to their function, no matter who offers the product 
or participates in the activity. Broker-dealer activities, for 
instance, are generally subject to SEC's jurisdiction, whether the 
broker-dealer is a subsidiary of a bank holding company subject to 
Federal Reserve supervision or a subsidiary of an investment bank. The 
functional regulator approach is intended to provide consistency in 
regulation, focus regulatory restrictions on the relevant functions 
area, and avoid the potential need for regulatory agencies to develop 
expertise in all aspects of financial regulation. 

Many of the largest financial legal entities are part of holding 
company structures--companies that hold stock in one or more 
subsidiaries--and conduct business and manage risks on a consolidated 
basis. Many of these companies are subject to consolidated supervision 
that provides a basis for examining the financial and operating risks 
faced by holding companies and the controls in place to manage those 
risks at a consolidated, or holding company-wide, level. Companies that 
own or control banks are regulated and supervised by the Federal 
Reserve as bank holding companies, and their nonbanking activities 
generally are limited to those the Federal Reserve has determined to be 
closely related to banking. Under the Gramm-Leach-Bliley Act, bank 
holding companies can qualify as financial holding companies and 
thereby engage in a range of financial activities broader than those 
permitted for "traditional" bank holding companies. Savings and loan or 
thrift holding companies (thrift holding companies), that own or 
control one or more savings associations (but not a bank) are subject 
to supervision by OTS and, depending upon certain circumstances, may 
not face the types of activities' restrictions imposed on bank holding 
companies. Certain holding companies that own large broker-dealers can 
elect to be supervised by SEC as consolidated supervised entities 
(CSE). SEC provides group-wide oversight of these entities unless they 
are determined to already be subject to "comprehensive, consolidated 
supervision" by another principal regulator. While holding company 
supervisors oversee the holding company, the appropriate functional 
regulator remains primarily responsible for supervising any 
functionally regulated subsidiary within the holding company. 

In prior reports, we have noted that characteristics of the U.S. 
regulatory structure can have positive effects.[Footnote 9] 
Specialization by regulatory agencies allows them to better understand 
the risks associated with particular activities or products. 
Competition among regulators helps to account for regulatory 
innovation, providing businesses with a method to move to regulators 
whose approaches better match businesses' operations. We also have 
noted that the system is complex, with a single large firm subject to 
oversight by multiple federal and state agencies, as figure 1 

Figure 1: Federal Supervisors for a Hypothetical Financial Holding 

[See PDF for image] 

Source: GAO. 

[End of figure] 

The Federal Reserve and the Department of the Treasury (Treasury) also 
share responsibility for maintaining financial stability. Treasury also 
represents the United States on international financial market issues 
and, in consultation with the President, also may approve special 
resolution options for insolvent financial institutions whose failure 
could threaten the stability of the financial system. Two-thirds of the 
Federal Reserve's Board of Governors and FDIC's Board of Directors must 
approve any extraordinary coverage. 

Measuring the Costs and Benefits of Regulation Has Been Difficult, 
Complicating Efforts to Reduce Regulatory Burden: 

Measuring the costs and benefits of financial regulation has posed a 
challenge to regulators and the financial services industry. Though 
precise measurement remains a challenge, many claim regulation has 
become more burdensome over time. Regulators have responded to these 
concerns by reviewing existing regulations to identify ways to reduce 
unnecessary regulatory burdens. Such reviews have, in some cases, 
assisted in identifying the costs and benefits of regulation and 
removing unnecessary burden. However, some groups still assert 
regulatory burden has increased significantly over time and regulators 
should do more to address such burdens. Forum participants agreed with 
these assertions, suggesting regulators improve measurements of the 
results of implemented regulations as a way to promote their own 
regulatory accountability. We recently recommended several steps that 
agencies should take to ensure they conduct effective and transparent 
reviews of regulations, including consideration of whether and how to 
measure the performance of regulation during the process of 
promulgating the regulation and steps to improve the communication of 
regulatory reviews to the public.[Footnote 10] 

Regulators and the Financial Services Industry Face Challenges 
Measuring Regulatory Costs and Benefits: 

The difficulty of reliably estimating the costs of regulation to the 
industry and to the nation has long been recognized, and the benefits 
of regulation are generally regarded as even more difficult to measure. 
This situation presents challenges for regulators that attempt to 
estimate the anticipated costs of regulations, and also for industry to 
substantiate claims about regulatory burden. For example, a 1998 
Federal Reserve staff study concluded that it had insufficient 
information to reliably estimate the total cost of regulations for 
commercial banks.[Footnote 11] 

One limitation of efforts to measure regulatory costs is the difficulty 
that businesses have in separating the costs of regulatory compliance 
from other costs related to risk management or recordkeeping. For 
instance, bank capital adequacy regulation provides an example of the 
inherent difficulty of assessing the value of regulation. Our work on 
the implementation of the Basel II risk-based capital framework noted 
that banks often could not separate out costs related directly to the 
implementation of the framework, as systems often served multiple 
purposes, such as reporting for many kinds of regulations and also for 
internal, risk management purposes.[Footnote 12] Similarly, an analysis 
of financial regulation in the United Kingdom found that firms tend not 
to separate out costs for complying with regulations, and firms could 
not estimate hypothetical savings if certain regulations were 
removed.[Footnote 13] 

While regulation provides a broad assurance of the strength of 
financial markets, it is difficult to measure those benefits, in part 
because regulations seeking to ensure financial stability aim to 
prevent low-probability, high-cost events. 

Concerns Exist that Regulation Could Hinder Market Efficiency: 

Recent reports by industry participants, academics, and policymakers 
also have suggested that regulatory burden may be lessening U.S. 
securities markets' viability and challenging their 
competitiveness.[Footnote 14] A number of factors have been asserted as 
contributing to a perceived loss in U.S. competitiveness, with one 
potential factor being the litigious environment of the United States. 
Some industry representatives, market analysts, and academics argue 
that this environment creates concerns for firms about potential class 
action and other lawsuits that may impact their decision to engage in 
business in the United States. Another factor is the often limited 
coordination among regulators that at times results in overlapping 
regulatory jurisdictions and confusing regulations. Additionally, 
questions regarding the jurisdiction over some financial products raise 
doubts for firms about how such products will be regulated. For 
example, the U.S. Chamber of Commerce has questioned whether CFTC 
should have jurisdiction over securities futures products, and 
recommended that jurisdiction be shifted to the SEC.[Footnote 15] In 
our work we also have noted that SEC and CFTC share overlapping 
jurisdiction on financial products that have the features of both 
securities and futures, which can inhibit market innovation by 
potentially causing market participants to design products based on how 
they might be regulated.[Footnote 16] However, some argue that 
regulatory competition helps bring about innovation in regulatory 
approaches, as one Forum participant noted. 

U.S. Regulators Have Reviewed Existing Regulations: 

U.S. regulatory agencies have undertaken several efforts to lessen 
regulatory burden and cost of existing regulations. Federal banking 
agencies have undertaken a major initiative to address the regulatory 
burden of depository institutions in response to the Economic Growth 
and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). The act 
requires federal banking regulators to review their regulations at 
least once every 10 years and to identify and eliminate outdated, 
unnecessary, or unduly burdensome regulatory requirements, as 
appropriate. Agencies also are required to report to Congress on 
regulatory burdens that must be addressed through legislative 
action.[Footnote 17] 

Bank regulatory agencies have made changes to regulation and reporting 
requirements as part of the EGRPRA process. Bank agencies modernized 
their call report procedures, for instance,[Footnote 18] and sought 
comments and suggestions on outdated, unnecessary, or overly burdensome 
regulations. In response to these comments, for example, OCC published 
a Notice of Proposed Rulemaking soliciting comments on proposed 
amendments to OCC regulations that, among other changes, would 
eliminate or streamline existing requirements or procedures.[Footnote 
19] Another outcome of the EGRPRA process was the development of 
proposals that were incorporated into the Financial Services Regulatory 
Relief Act of 2006. 

Forum Participants Shared Concerns Regarding Regulatory Burden: 

A majority of Forum participants held the view that regulations had 
become more burdensome over the past decade. However, one participant 
noted that while some regulations may be considered burdensome to 
industry, they may be necessary to ensure public confidence. Others 
noted the importance of considering legislation's contribution to 
regulatory burden. In addition, some participants shared the opinion 
that federal regulation has hurt the competitiveness of U.S. securities 

Some Forum participants agreed that cost-benefit analysis presents a 
number of measurement challenges, primarily because some costs are 
easier to measure than benefits. One participant, for instance, noted 
the benefits from legislation or regulation could include enhanced 
confidence in markets, something that cannot be valued. Forum 
participants suggested measurement should focus on outcomes and 
results, and regulators should improve measurements for their own 
regulatory accountability. One participant noted the Bank Secrecy Act 
(BSA), for example, has resulted in filing many currency transaction 
reports and suspicious activity reports, but the benefits of such 
filings are sometimes unclear to banks.[Footnote 20] The participant 
added that regulators should consider whether the BSA is providing the 
intended results and outcomes, considering the costs.[Footnote 21] 

To improve the measurement of costs and benefits, some Forum 
participants thought a good practice to adopt from the U.K.'s Financial 
Services Authority (FSA) would be its conduct of cost-benefit analyses. 
To assure that FSA accomplishes its regulatory goals efficiently, it is 
required to submit cost-benefit analyses for its proposals. In 
addition, FSA must report annually on its costs relative to the costs 
of regulation in other countries and must provide its next fiscal year 
budget for public comment 3 months prior to the end of the current 
fiscal year. 

While regulators have attempted to address concerns about regulatory 
burden by issuing guidance, assessing the level of regulatory burden, 
and conducting retrospective reviews, a majority of Forum participants 
also believed regulatory bodies could take advantage of additional 
opportunities to reduce the regulatory burden placed on financial 
firms. One participant noted that the London Stock Exchange's 
Alternative Investment Market (AIM)[Footnote 22] is an example of a 
market that has little regulation and might demonstrate how lighter 
regulatory approaches could be implemented. This participant also 
noted, however, that such approaches have been criticized for not 
providing adequate investor protection. 

We Have Recommended Improved Review of Regulations: 

Retrospective reviews such as those conducted under EGRPRA and other 
legislation and guidance assist in assessing the effectiveness of how 
regulations were implemented and help identify opportunities to reduce 
regulatory burdens and validate regulatory cost and benefit 
estimates.[Footnote 23] The EGRPRA process, for example, provided an 
opportunity for the financial industry to suggest ways to improve upon 
and simplify regulations applicable to federally-insured depository 
institutions. Regulatory agency officials reported that similar 
retrospective reviews have resulted in cost savings to their agencies 
and to regulated parties. For example, the agencies noted that 
modernized call report processing would decrease the cost of data 
collection and verification for all parties. 

In a 2007 report, we recommended that agencies improve the 
effectiveness and transparency of retrospective regulatory reviews and 
identify opportunities for Congress to revise and consolidate existing 
requirements.[Footnote 24] We found that though agencies have conducted 
many such reviews, the public generally remains unaware of the scope 
and frequency of such reviews, and agencies can be better prepared to 
undertake reviews by planning how they will collect relevant 
performance data on regulations before promulgating the regulation, or 
prior to the review. 

Developments in a Dynamic Financial Industry Environment Pose 
Challenges to the Federal Financial Regulatory Structure: 

Strengths of the current regulatory structure--including regulatory 
competition, regulatory specialization, and charter choice--have 
contributed to the development of a strong U.S. financial system. 
However, the structure is not always well-suited to handle challenges 
and emerging issues in the financial industry. Industry developments, 
including the trends of consolidation and globalization, as well as 
legislative changes, challenge regulators to provide consistent 
regulatory guidance and treatment of similar firms. Further, increased 
convergence in product offerings and increased concentration of assets 
in large, complex firms pose a challenge for regulatory agencies to act 
consistently in responding to risks that cut across the functional 
lines that define the regulatory structure. While the regulatory 
agencies have taken action to work collaboratively in response to the 
industry's trends, we have noted in the past that it is difficult to 
collaborate within the fragmented U.S. regulatory system and concluded 
that the structure of the federal regulatory system should be 

Aspects of the Current Regulatory Structure Have Contributed to a 
Strong Financial System but also Create Challenges: 

The current regulatory structure has contributed to the development of 
U.S. financial markets and to overall economic growth and stability. 
However, this structure, characterized by specialization of and 
competition among multiple regulatory agencies, has both strengths and 
weaknesses. On the positive side, specialization allows regulators to 
better understand the risks associated with particular activities or 
products and to better represent the views of all segments of the 
industry. Moreover, regulators have developed skilled staff with 
specialized knowledge of particular industries that can be brought to 
bear during supervisory examinations. Competition among regulators 
helps to account for regulatory innovation by providing businesses with 
a choice among regulators whose approaches better match the businesses' 
operations. Regulated financial institutions have learned to operate 
and even thrive under the existing regulatory system. Banks, for 
example, note the benefit of having multiple charter options that serve 
different business needs.[Footnote 25] Competition among the banking 
regulators, especially the Federal Reserve and OCC, is credited with 
prompting certain changes in regulation. These changes include the 
removal of prohibitions against securities firms, banks, and insurance 
companies operating in a single holding company structure and increased 
regulatory attention to the provision of loans in certain minority 
areas.[Footnote 26] 

At the same time, these very characteristics may hinder the effective 
and efficient oversight of large, complex, internationally active firms 
that compete across sectors and national boundaries. The specialized 
and differential oversight of holding companies by different regulators 
has the potential to create competitive imbalances among firms based on 
regulatory differences alone. Specifically, although holding companies 
in different sectors may offer similar services and therefore have 
similar risk profiles, they may not be subject to the same supervision 
and regulation. For example, under the new CSE rules, some firms could 
be subject to both SEC and OTS holding company oversight, and as OTS 
pointed out in its response to the CSE proposal, perhaps subject to 
conflicting regulatory requirements. 

Key Trends Have Changed the Financial Services Industry: 

Legislative and industry developments have brought about four key 
interrelated and ongoing trends in the financial services 
industry:[Footnote 27] 

* consolidation: fewer firms comprise the industry than in the past; 

* conglomeration: firms have merged or acquired one another, creating 
fewer, often larger firms in terms of asset size; 

* convergence: banking, securities, and futures firms offer similar 
products; and: 

* globalization: firms have expanded throughout the country and the 

The financial services industry, generally, has seen an increased 
concentration of assets in the largest firms, combined with a decrease 
in the overall number of firms. This trend is most dramatic in the 
banking sector of the financial services industry. During the 10-year 
period between 1996 and 2006, banking institutions merged or acquired 
each other to such an extent that 24 percent fewer institutions existed 
in 2006 than 10 years earlier (decreasing from 11,480 to 8,683 
institutions). At the same time, the share of banking assets held by 
the largest 25 banks grew from about 34 percent to about 58 percent 
(see fig. 2.). 

Figure 2: Percent of Assets Held by Largest 25 Banks and Number of 
Active Banking Institutions, 1996-2006: 

[See PDF for image] 

Source: FDIC data on active insured depository institutions. 

[End of figure] 

Small institutions, such as small credit unions and state-chartered 
banks, are the most numerous, though the number of all institutions 
under the various charters has decreased over time.[Footnote 28] 
Consolidation has been pronounced in national banks. The number of 
national banks has decreased by 37 percent, from 2,726 to 1,715, and 
their assets increased nearly three-fold, from $2.5 trillion to $6.8 
trillion (see fig. 3). The increase in assets from 1996 through the end 
of 2006 has been significant for other institutions as well, with 
assets at least doubling among state-chartered commercial banks that 
are not members of the Federal Reserve (from $925 billion to $1.9 
trillion), federally chartered savings banks (from $614 billion to $1.3 
trillion), and credit unions (from $327 billion to $710 billion). 

Figure 3: Changes in Assets by Bank Charter, 1996-2006: 

[See PDF for image] 

Source: GAO analysis based on data from FDIC and NCUA. 

[End of figure] 

The securities and futures segments also have seen substantial growth 
in volume. Since 1996, assets among securities firms have increased 
about 70 percent--from about $1.8 trillion to about $5.9 trillion, 
according to the Securities Industry and Financial Markets 
Association.[Footnote 29] The securities industry has long been 
concentrated, with the assets of the largest 10 firms exceeding 50 
percent since at least 1996.[Footnote 30] Similarly, the annual volume 
of active trading in futures contracts increased from about 499 million 
contracts to more than 2.5 billion between 1996 and 2006, according to 
the CFTC. 

The conglomeration of firms and convergence of products offered by 
firms across sectors increasingly have come to characterize the large 
players in the industry. With regard to increased conglomeration, a 
research report by International Monetary Fund (IMF) staff--based on a 
worldwide sample of the largest 500 financial services firms in terms 
of assets--shows that the percentage of U.S. financial institutions in 
the sample engaged to some significant degree in at least two of the 
functional sectors of banking, securities, and insurance increased from 
42 percent in 1995 to 61.5 percent in 2000. In addition, the 
conglomerates included in the IMF review held 73 percent of the assets 
of all of the U.S. firms included in the sample.[Footnote 31] 

As a result of conglomeration, financial institutions have converged in 
their products, increasingly offering products that are less distinct 
than in the past. For example, banks, broker-dealers, and investment 
companies all offer variable annuities. In addition, these institutions 
offer accounts or services that are legally distinct but function in 
similar ways, such as checking accounts, cash management accounts, and 
money market mutual funds.[Footnote 32] 

Banks and securities firms have greatly extended their reach throughout 
the world, comprising an industry that has global operations. Such 
international presence has brought about links among markets, as 
evidenced by recent negative impacts on German and French banks as a 
result of subprime mortgage defaults in the United States.[Footnote 33] 
Increasingly, non-U.S. operations also form a substantial percentage of 
revenues for U.S.-based financial services firms. For example, Goldman 
Sachs reported to SEC that in the first half of 2007, it had earned the 
majority of its revenues (over 50 percent) from non-U.S. 
operations.[Footnote 34] Similarly, Citigroup reported that about 44 
percent of its income came from regions other than the United 
States.[Footnote 35] U.S.-based financial services firms have also 
increased their operational presence in other countries over time, with 
some firms booking most of their credit derivative trades, for example, 
in major markets such as London.[Footnote 36] 

Recent Legislative Changes Have Affected the Financial Services 

The financial services industry and the manner in which it is regulated 
have changed in recent decades as a result of legislative action. The 
legislation both responded and contributed to the industry trends. For 
example, while banking and securities activities had generally been 
separated in the United States after the Glass-Steagall Act of 1933, 
the Gramm-Leach-Bliley Act of 1999 eased many of the restrictions 
limiting the ability of banks and securities firms to affiliate with 
one another; some restrictions, however, had been gradually eased as a 
result of regulatory interpretations of prior law. 

As figure 4 indicates, changes in legislation have affected business 
practices of the financial services industry as well as its regulatory 
oversight. In many cases, legislation responded to a crisis. The 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) 
of 1991 responded, in large part, to the savings and loan crisis of 
that period. FDICIA, for instance, mandated that the agencies take 
"prompt corrective action" when a bank's capital falls below specified 
thresholds; this responded to concerns that regulatory forbearance with 
troubled institutions was excessive and contributed to further 

Figure 4: Selected Legislation Resulting in Financial Regulatory 

[See PDF for image] 

Source: GAO. 

[A] Pub. L. No. 91-508, Titles I, II, 84 Stat. 1114, 1118 (1970). 

[B] Pub. L. No. 106-102, 113 Stat. 1338 (1999). 

[C] Pub. L. No. 109-351, 120 Stat. 1966 (2006). 

[D] Pub. L. No. 94-200, Title III, 89 Stat. 1124, 1125 (1975). 

[E] Pub. L. No. 107-204, 116 Stat. 745 (2002). 

[F] Pub. L. No. 96-221, 94 Stat. 132 (1980). 

[G] Pub. L. No. 97-320, 96 Stat. 1469 (1982). 

[H] Pub. L. No. 103-328, 108 Stat. 2338 (1994). 

[I] Pub. L. No. 107-56, Title III, 15 Stat. 272, 296 (2001). 

[J] Pub. L. No. 109-171, Title II, 120 Stat. 4, 9 (2005). 

[K] Pub. L. No. 101-73, 103 Stat. 183 (1989). 

[L] Pub. L. No. 104-290, 110 Stat. 3416 (1996). 

[M] Pub. L. No. 102-242, 105 Stat. 2236 (1991). 

[N] Pub. L. No. 104-208, Title II, Div. A, 110 Stat. 3009-394 (1996). 

[End of figure] 

In addition, legislation over the past two decades has created new 
reporting requirements for firms, such as disclosures required by the 
Home Mortgage Disclosure Act and enhanced antiterrorism and antimoney- 
laundering requirements, such as those imposed by the USA Patriot Act. 

These laws, however, have not led to comprehensive changes in the 
federal financial regulatory structure. For example, the landmark Gramm-
Leach-Bliley Act in some ways recognized the blurring of distinctions 
among banking, securities, and insurance activities that had already 
happened in the marketplace and codified regulatory decisions that had 
been made to deal with these industry changes. While recognizing 
industry and regulatory changes, that act changed neither the number of 
regulatory agencies nor, in most cases, the primary objectives and 
responsibilities of the existing agencies. 

Recent Industry Changes Demonstrate the Challenges Confronting 
Financial Regulators: 

The industry's trends, coupled with legislative changes, challenge 
regulatory agencies to provide adequate regulatory oversight while 
ensuring that regulation does not place any segment of the industry at 
a disadvantage relative to the others. The current structure--with its 
multiple regulators and charters--is further challenged by the need to 
recognize sector differences and simultaneously provide similar 
regulatory treatment for similar products. Regulatory agencies do 
collaborate to ensure consistent treatment of similar activities across 
institutional charters and legal entities, as well as in consolidated 
supervision of large, complex organizations. However, our prior work 
involving (1) consolidated supervision of holding companies, (2) the 
ILC charter, (3) U.S. capital adequacy regulation, (4) charter choice 
and OCC preemption rules, and (5) the regulation of securities and 
futures markets found instances where regulatory differences could lead 
to unequal treatment of firms. 

Consolidated Supervision of Holding Companies: 

Consolidated supervision[Footnote 37]--holding company supervision at 
the top tier or ultimate holding company in a financial enterprise--has 
become more important in light of changes in the financial services 
industry, particularly with respect to the increased importance of 
enterprise risk management of large, complex financial services firms. 
The Gramm-Leach-Bliley Act recognized the blurring of distinctions 
among the banking, securities and insurance activities happening in the 
marketplace, and recognized consolidated supervision as a basis for 
regulators to oversee the risks of financial services firms on the same 
level that the firms manage those risks. In March 2007, we reported 
that many large U.S. financial institutions were being supervised on a 
consolidated basis and that this was consistent with international 
standards that focus on having regulators familiar with the 
organizational structure, risk management and controls, and capital 
adequacy of these enterprises.[Footnote 38] 

In this prior work, however, we found some evidence of duplication and 
inconsistency when different agencies are responsible for consolidated 
and primary supervision, suggesting that opportunities remain for 
enhanced collaboration to promote greater consistency.[Footnote 39] For 
example, we found that while the Federal Reserve and OCC have and 
generally follow procedures to resolve differences, a large, complex 
banking organization initially received conflicting information from 
the Federal Reserve, its consolidated supervisor, and OCC, its primary 
bank supervisor, about the firm's business continuity provisions. Also, 
SEC and OTS both have consolidated supervisory authority for some of 
the same firms but we found they did not have an effective mechanism 
for collaborating to prevent duplication and ensure consistency. In 
response, the Director of OTS said that he would take steps to develop 
an effective mechanism for OTS and SEC to work together. 

In order to ensure that consolidated supervisors, specifically the 
Federal Reserve, SEC, and OTS, are promoting consistency with primary 
bank and other supervisors and not duplicating efforts, we recommended 
in March 2007 that these agencies identify additional ways to more 
effectively collaborate with primary bank and functional supervisors 
(e.g., developing appropriate mechanisms to better define 
responsibilities and to monitor, evaluate, and report jointly on 
results).[Footnote 40] To take advantage of opportunities to promote 
better accountability and limit the potential for duplication and 
regulatory gaps, we recommended that these agencies foster more 
systematic collaboration among themselves to promote supervisory 
consistency, particularly for firms that provide similar services. In 
particular, we recommended that OTS and SEC clarify accountability when 
the agencies both had jurisdiction over a single company. Systematic 
collaboration would help to limit duplication, ensure that all 
regulatory areas are effectively covered, and ensure that resources are 
focused most effectively on the greatest risks across the regulatory 

ILC Holding Company Regulation: 

In 2005 we reported that the parent companies of ILCs were not being 
overseen at the consolidated level by bank supervisors with clear 
authority for consolidated supervision.[Footnote 41] ILCs typically are 
owned or controlled by a holding company that also may own other 
entities, and thus pose risks to the deposit insurance fund that are 
similar to those presented by other parents of depository institutions. 
However, FDIC, the primary bank supervisor for ILCs, has less extensive 
authority to supervise ILC holding companies than the Federal Reserve 
or OTS, the consolidated supervisors of bank and thrift holding 
companies, respectively. In addition, the parents of some ILCs--because 
they are exempt from the Bank Holding Company Act--are able to mix 
banking and commerce to a greater extent than the parents of other 
insured depository institutions.[Footnote 42] Because of these 
inconsistencies, we (and the FDIC Office of the Inspector General) 
concluded that ILCs in a holding company structure may pose more risk 
to the deposit insurance fund than other types of insured depository 
institutions operating in a holding company. We recommended that 
Congress consider (1) options that would better ensure supervisors of 
institutions with similar risks have similar authorities and (2) the 
advantages and disadvantages of a greater mixing of banking and 
commerce by ILCs or other financial institutions. In July 2006, FDIC 
announced a moratorium on ILC applications from commercial entities for 
6 months. On February 5, 2007, the agency extended the moratorium for 
another year.[Footnote 43] 

Basel II Implementation: 

Efforts to revise capital adequacy regulations for U.S. banks and bank 
holding companies also highlight the challenges regulatory agencies 
have in treating institutions consistently while also respecting their 
differences. Current capital adequacy regulations are based on a 1988 
international accord to establish a common framework and reduce 
competitive inequalities among international banks. Advances in risk 
management strategies and other developments since 1988, however, have 
prompted an effort through the Basel Committee on Banking Supervision 
to present a new framework--commonly called Basel II--that would 
reflect these developments. 

Applying Basel II in the United States has raised serious concerns, 
however. Because each federal regulator oversees a different set of 
institutions and has different perspectives and goals, reaching 
consensus on some issues in developing the Basel II framework has been 
difficult even though all of the agencies generally agree that 
limitations in the current Basel I framework have rendered it 
increasingly inadequate for supervising the capital adequacy of the 
largest, most complex banks. For example, officials from FDIC have been 
concerned about the use of banks' risk-based capital models under Basel 
II because, while these models have been used for internal risk 
assessment and management for years, with the exception of certain 
market risk models, they are relatively unproven as a regulatory 
capital tool, and questions remain about the reliability of data 
underlying the models. To address some of these concerns, agencies have 
proposed a number of safeguards in the proposed Basel II rule. 
Officials from the Federal Reserve and OCC--as the regulators of the 
vast majority of core banks that would be required to adopt Basel II's 
"advanced approach"--acknowledged data limitations and the uncertain 
impact on capital requirements, but highlighted the limitations of 
Basel I, the increased risk sensitivity of Basel II, the advances in 
risk management at large banks, the safeguards to ensure capital 
adequacy, and regulator experience in reviewing economic capital models 
as reasons to proceed with implementing Basel II. Further, regulatory 
agencies noted concerns about potential competitive inequities between 
large and small banks in the United States, if small banks are required 
to hold more regulatory capital than large banks for some similar 
risks. Finally, U.S. banks implementing Basel II's advanced approach 
have expressed concerns that the U.S. leverage requirement would put 
them at a competitive disadvantage against international financial 
institutions that do not face such a requirement.[Footnote 44] 

On September 25, 2006, the regulators issued a joint Notice of Proposed 
Rulemaking (NPR) that proposed a new risk-based capital adequacy 
framework that would require some and permit other qualifying banks to 
use an internal ratings-based approach to calculate regulatory credit 
risk capital requirements and advanced measurement approaches to 
calculate regulatory operational risk capital requirements. According 
to the NPR, the framework is intended to produce more risk-sensitive 
capital requirements than currently used by the agencies. The framework 
also seeks to build upon improvements to risk assessment approaches 
adopted by a number of large banks over the last decade. However, 
concern remained that applying different capital adequacy regulations 
to different institutions, even though it is intended to respect 
differences among institutions, may lead to competitive inequities. In 
our report, we made several recommendations to the agencies to improve 
the transparency of the process of developing new regulations.[Footnote 
45] On July 20, 2007, the agencies announced an agreement regarding 
implementation of Basel II and to finalize rules implementing the 
advanced approaches for computing large banks' risk-based capital 
requirements expeditiously. 

OCC Preemption and Charter Choice: 

Bank regulatory agencies and others have argued that charter choice, 
allowing for differences in the regulation of financial institutions, 
is a central element in promoting an efficient U.S. financial services 
industry. This choice permits institutions to not only select the 
charter that best corresponds to their business plans and organization 
but also to protect themselves against arbitrary regulation. 
Differences in regulation reflect, at least in part, differences 
between the types of charters. In turn, regulatory competition has 
prompted changes to modernize the regulatory structure and allow 
financial institutions to offer a diverse range of products and 
services to meet the needs of their customers. However, such diversity 
challenges regulatory agencies to ensure supervisory and regulatory 
differences are based on legitimate differences in business plans and 
intended markets among the institutions under supervision and not an 
attempt to give one type of institution a competitive advantage over 

The recent debate regarding OCC's interpretation of its authority to 
preempt state laws brought particular attention to the question of 
regulatory consistency, charter choice, and safety and soundness. In 
January 2004, OCC issued two final rules that are jointly referred to 
as the preemption rules. The "bank activities" rule addressed the 
applicability of state laws to national banking activities, while the 
"visitorial powers" rule set forth OCC's view of its authority to 
inspect, examine, supervise, and regulate national banks and their 
operating subsidiaries. The rules addressed OCC's authority to preempt 
state laws that applied to operating subsidiaries of national banks if 
those operating subsidiaries were conducting banking activities 
permitted for the national bank itself. However, the rules do not fully 
resolve uncertainties about the applicability of state consumer 
protection laws, particularly those aimed at preventing unfair and 
deceptive acts and practices. National banks are subject to federal 
consumer protection laws, including the Federal Trade Commission Act's 
prohibition of unfair or deceptive acts or practices. OCC supervises 
national banks and helps to enforce their compliance with these federal 
requirements. Opponents of OCC's position stated such preemption would 
weaken consumer protections and the rules could undermine the dual 
banking system, because state-chartered banks would have an incentive 
to change their charters from state to federal since national banks do 
not have to comply with state laws that apply to banking activities 
and, to the extent that compliance with federal law is less costly or 
burdensome than state regulation, the federal charter provides for 
lower regulatory costs and easier access to markets.[Footnote 46] 
Supporters of the rules asserted that providing consistent regulation 
for national banks, rather than differing state regulatory regimes, was 
necessary to ensure efficient nationwide operation of national banks. 
Recently, the Supreme Court upheld OCC authority under the National 
Bank Act to preempt state regulation of the mortgage lending activities 
of a national bank's operating subsidiary.[Footnote 47] 

In our review of OCC's preemption rulemaking, we recommended that the 
Comptroller of the Currency clarify the characteristics of state 
consumer protection laws that would make them subject to federal 
preemption. OCC responded that the Consumer Financial Protection Forum, 
chaired by the U.S. Department of the Treasury, was established to 
bring federal and state regulators together to focus exclusively on 
consumer protection issues and to provide a permanent forum for 
communication on those issues. OCC believes this will provide an 
opportunity for federal and state regulators to better understand their 
differing perspectives, but what effect the Consumer Financial 
Protection Forum will have remains to be determined. 

SEC and CFTC Joint Jurisdiction over Certain Products: 

Securities and futures markets, regulated by SEC and CFTC respectively, 
have become increasingly interconnected, raising the question whether 
separate regulatory agencies over these markets remain appropriate. SEC 
has authority over securities trading and the securities markets, whose 
primary purpose historically has been to facilitate capital formation. 
CFTC has authority over futures trading and the futures markets, which 
have primarily been used for risk management purposes. However, 
distinction between a financial product as a security or a future has 
become increasingly difficult as more and more products are developed 
that combine characteristics of both securities and futures. 
Derivatives--including security-based futures and options as well as 
traditional commodity-based contracts--have grown dramatically in 
recent years.[Footnote 48] There is concern that the split in 
regulatory responsibility between SEC and CFTC could result in 
uncertainty about regulatory jurisdiction over some types of derivative 
products and possibly encourage companies to structure new products and 
activities so they avoid oversight completely. 

We have long reported that the differences in U.S. securities and 
futures laws and markets will continue to require both SEC's and CFTC's 
regulatory staff to have some specialized expertise.[Footnote 49] 
However, the two agencies also have had to work together to clarify 
their joint jurisdiction over certain products, such as futures on 
single stocks and certain stock indexes. Concerns that restrictions in 
a 1981 agreement between CFTC and SEC to prevent such trading on 
futures exchanges may have limited investor choice led to calls to 
repeal the restrictions. These calls were countered by concerns about 
doing so without first resolving applicable differences between 
securities and commodities laws and regulations, including the lack of 
comparable insider trading restrictions and consumer protection 
requirements. We recommended that CFTC and SEC work together and with 
Congress to develop and implement an appropriate legal and regulatory 
framework for removing the restrictions.[Footnote 50] In 2000, CFTC and 
SEC reached agreement to jointly regulate single stock futures under a 
framework aimed at promoting competition, maintaining market integrity, 
and protecting customers. In turn, Congress codified the agreement in 
the Commodity Futures Modernization Act of 2000. 

Regulators Have Often Collaborated to Respond to Regulatory Challenges 
but More Could Be Done: 

Under the current structure, financial regulatory agencies often have 
collaborated to achieve their goals. For example, in 2007, we reported 
on a joint regulatory initiative of bank and securities regulators that 
recently facilitated the monitoring of industry-wide progress on 
reducing confirmation backlogs in the regulation of over-the-counter 
credit derivatives.[Footnote 51] In 2006, we reported that in an effort 
to establish greater consistency in their examination procedures and 
oversight directed at preventing, detecting, and prosecuting money 
laundering, the federal banking regulators, with participation from the 
Financial Crimes Enforcement Network, jointly developed and issued an 
interagency examination procedures manual describing the risk 
assessments for Bank Secrecy Act (BSA) examinations.[Footnote 52] To 
further strengthen BSA oversight, the agencies said that they were 
committed to ongoing interagency coordination. The bank regulatory 
agencies and NCUA also participate in the Federal Financial 
Institutions Examination Council, established in 1979 as a formal 
interagency communication vehicle for prescribing uniform supervisory 
standards.[Footnote 53] A representative of state banking authorities 
was added to this council as a full voting member by the Financial 
Services Regulatory Relief Act of 2006. FDIC, the Federal Reserve, and 
OCC also work collaboratively under the Shared National Credit Program 
(a joint review of large, syndicated loans shared by banks that may 
have different supervisors) and the Interagency Country Exposure Review 
Committee (a joint determination of the level of risk for credit 
exposures to various countries). Moreover, both the Comptroller of the 
Currency and the Director of OTS are members of the FDIC Board of 

More broadly, federal financial regulators have been involved in 
interagency efforts, including the President's Working Group, which 
provides a framework for coordinating policies and actions that cross 
agency jurisdictional lines.[Footnote 54] We have reported, however, 
that the Group is not well suited to orchestrate a consistent set of 
goals or objectives that would direct the work of the different 
agencies. We noted that agency officials involved with the Group were 
"generally adverse to any formalization of the group and said that it 
functions well as an informal coordinating body."[Footnote 55] 

While the agencies do exchange information, they have opportunities to 
improve collaboration. We have noted in the past that it is difficult 
to collaborate within the fragmented U.S. regulatory system and have 
recommended that Congress modernize or consolidate the regulatory 
system. However, we previously have reported that under the current 
system, agencies have opportunities to collaborate more systematically 
and thus ensure that institutions operating under the oversight of 
multiple financial supervisors receive consistent guidance and face 
minimal supervisory burden. In our consolidated supervision report, we 
made recommendations to the Federal Reserve, OTS, and SEC to improve 
efforts to collaborate and increase consistency in their consolidated 
supervision program. In addition, we recommended that agencies foster 
more systematic collaboration among their agencies to promote 
supervisory consistency, particularly for firms that provide similar 
services.[Footnote 56] In particular, we recommended that OTS and SEC 
clarify accountability for holding companies that operate under both 
agencies' jurisdictions. (The agencies have reported subsequent actions 
to improve their programs in these regards.) 

Accountability for Identifying and Responding to Risks that Span 
Financial Sectors Is Not Clearly Defined: 

Because our regulatory structure relies on having clear-cut boundaries 
between the "functional" areas, industry changes that have caused those 
boundaries to blur have placed strains on the regulatory framework, and 
accountability for addressing risks that cross boundaries is not 
clearly defined. While diversification across activities and locations 
may have lowered the risks faced by some large, complex, 
internationally active firms, understanding and overseeing them also 
has become a much more complex undertaking, requiring staff who can 
evaluate the risk portfolio of these institutions and their management 
systems and performance. Regulators must be able to ensure effective 
risk management without needlessly restraining risk taking, which would 
hinder economic growth. Similarly, because firms are taking on similar 
risks across "functional" areas, to understand the risks of a given 
institution or those that span institutions or industries, regulators 
need a more complete picture of the risk portfolio of the financial 
services industry as a whole, both in the United States and abroad. 

As we have discussed above, some of the means by which U.S. regulators 
collaborate across sectors do not provide for the systematic sharing of 
information, making it more difficult for regulators to identify 
emerging threats to financial stability. These means also do not allow 
for a satisfactory assessment of risks that cross traditional 
regulatory and industry boundaries and therefore may inhibit the 
ability to detect and contain certain financial crises, as can be seen 
in the following: 

* With regard to the President's Working Group, we reported in 2000 
that although it has served as a mechanism to share information during 
unfolding crises, its activities generally have not included such 
matters as routine surveillance of risks that cross markets or of 
information sharing that is specific enough to help identify potential 
crises.[Footnote 57] The Group has served as an informal mechanism for 
coordination and cooperation rather than as a mechanism to ensure 
accountability for issues that span agency jurisdiction. 

* In reviewing the near collapse of Long-Term Capital Management 
(LTCM)--one of the largest U.S. hedge funds--in 1998, we reported that 
regulators continued to focus on individual firms and markets but 
failed to address interrelationships across industries; accountability 
for those relationships was not clearly defined. Thus, federal 
financial regulators did not identify the extent of weaknesses in bank, 
securities, and futures firm risk management practices until after 
LTCM's near collapse and had not sufficiently considered the systemic 
threats that can arise from unregulated entities.[Footnote 58] 

* In reviewing responses to the events of September 11, 2001, we 
reported that the multiple agency structure of U.S. financial services 
regulation has slowed the development of a strategy that would ensure 
continuity of business for financial markets in the event of a 
terrorist attack.[Footnote 59] 

* In a recent review of interagency communication regarding enforcement 
actions taken by the regulatory agencies against individuals and firms, 
we reported that while information sharing among financial regulators 
is a key defense against fraud and market abuses, regulators do not 
have ready access to all relevant data related to regulatory 
enforcement actions taken against individuals or firms. We also 
reported that many financial regulators do not share relevant consumer 
complaint data amongst themselves on certain hybrid products such as 
variable annuities (products that contain characteristics of both 
securities and insurance products) in a routine, systematic fashion, 
compounding the problem that consumers may have in identifying the 
relevant regulator.[Footnote 60] 

Through its supervision of bank and financial holding companies, the 
Federal Reserve has oversight responsibility for a substantial share of 
the financial services industry. The scope of its oversight, however, 
is limited to bank and financial holding companies. While each agency 
develops its own strategic plan for meeting its mission, no government 
agency has the authority to identify and address issues in the 
financial system as a whole, and monitor the ability of regulators to 
meet their objectives on an ongoing basis.[Footnote 61] We repeatedly 
have noted that regulators could do more to share information and 
monitor risks across markets or "functional" areas to identify 
potential systemic crises and limit opportunities for fraud and 
abuse.[Footnote 62] 

From an overall perspective the system is not proactive, but instead 
reacts in a piecemeal, ad hoc fashion--often when there is a crisis. 
During a crisis, or in anticipation of one, no one has the authority 
and there is no formal cooperative mechanism to conduct risk analyses, 
prioritize tasks, or allocate resources across agencies, although the 
Office of Management and Budget may perform some of these tasks for 
agencies funded by federal appropriations. Several Forum participants, 
for instance, suggested that Congress establish an agency with 
authority to set regulatory standards and goals and to hold regulators 
accountable to those goals. 

The federal financial regulatory agencies face challenges posed by the 
dynamic financial environment: the industry's trends of consolidation, 
conglomeration, convergence, and globalization have created an 
environment that differs substantially from the prevailing environment 
when agencies were formed and their goals set by legislation. In 
particular, the fact that different agencies have jurisdiction over 
large, complex firms that offer similar services to their customers 
creates the potential for inconsistent and inequitable treatment. 
Differences, even subtle ones, among the agencies' goals exacerbate the 
potential for inconsistency. Several Forum participants noted that 
subtle differences among agency goals can be significant. Further, 
despite the changes posed by the industry's dynamic environment, clear 
accountability for addressing issues that span agencies' jurisdiction 
is not clearly assigned in the current system. These issues have led us 
to suggest that modernizing the federal financial regulatory system is 
a key challenge facing the United States in the 21st century. 

Options to Change the Federal Financial Regulatory Structure: 

In our previous work, we suggested options for Congress to consider to 
modernize the current regulatory system. Additionally, others have 
recommended changes, frequently intended to simplify the complex 
multiagency structure. The financial regulatory structure, however, has 
remained largely the same despite changes in the financial services 
industry. Forum participants and others have suggested that some 
lessons could be learned from the principles-based approach to 
regulation of the United Kingdom's Financial Services Authority (FSA). 
However, participants also noted that the lessons should be considered 
in light of the differences between the United States and the United 
Kingdom and the limited experience of FSA, particularly the fact that 
it had not dealt, at the time of the Forum, with a significant economic 
crisis or downturn. Defining clear and consistent goals for regulatory 
agencies would be a significant step toward modernizing the regulatory 

Modernizing the Financial Regulatory System Remains a Challenge: 

As early as 1994, we voiced our support for modernizing the federal 
financial regulatory structure. More recently, we provided various 
options for Congress to consider, including: 

* consolidating the regulatory structure within the "functional" areas; 

* moving to a regulatory structure based on regulation by objective (a 
"twin peaks" model); 

* combining all financial regulators into a single entity; or: 

* creating or authorizing a single entity to oversee all large, 
complex, internationally active firms, while leaving the rest of the 
structure in place. 

Each of these options would provide potential improvements, as well as 
some risks and costs. Consolidating the regulatory structure within 
"functional" areas, such as banking and securities, would provide a 
central point of communication for a sector's issues and could reduce 
barriers to communication and coordination among the regulatory 
agencies; it also could remove opportunities for regulatory 
experimentation and the other positive aspects of regulatory 
competition. A "twin peaks model" would involve setting up one safety 
and soundness regulatory entity and one conduct-of-business regulatory 
entity charged with ensuring compliance with the full range of conduct- 
of-business issues, including consumer and investor protection, 
disclosure, money laundering, and some governance issues. On the 
positive side, this could ensure that conduct-of-business issues are 
not subordinated to safety and soundness issues, as some fear. However, 
this structure would not facilitate regulators' understanding of 
linkages between safety and soundness and conduct-of-business, such as 
a financial services firm's reputational risk. A single regulator, like 
FSA, would have the ability to evaluate such linkages, but ensuring the 
accountability of such a large agency to consumers or industry would be 
difficult. Finally, a single agency charged with oversight of large, 
complex firms could be able to provide consistent regulatory treatment 
and to identify and respond to issues that cross current regulatory 
agency boundaries. However, it might be difficult to find and maintain 
an appropriate balance between the interests of the large, 
internationally active firms and smaller entities; this option, 
further, might add another agency to a regulatory system that already 
has many agencies.[Footnote 63] 

IMF noted these options in suggesting that the United States review the 
rationalization for its financial regulation. 

As we previously have noted, the specifics of a regulatory structure, 
including the number of regulatory agencies and roles assigned to each, 
may not be the critical determinant in whether a regulatory system is 
successful. The skills of the people working in the regulatory system, 
the clarity of its objectives, its independence, and its management 
systems are also critical to the success of financial 
regulation.[Footnote 64] 

Others also have proposed changes to modernize the financial regulatory 
system, including the following: 

* 1994 Treasury proposal.[Footnote 65] This proposal would have 
realigned the federal banking agencies by core policy functions--that 
is, bank supervision and regulation function, central bank function, 
and deposit insurance function. Generally, this proposal would have 
combined OCC, OTS, and certain functions of the Federal Reserve and 
FDIC into a new independent agency, the Federal Banking Commission, 
that would have been responsible for bank supervision and regulation. 
FDIC would have continued to be responsible for administering federal 
deposit insurance, and the Federal Reserve would have retained central 
bank responsibilities for monetary policy, liquidity lending, and the 
payments system. Although FDIC and the Federal Reserve would have lost 
most bank supervisory rule-making powers, each would have been allowed 
access to all information of the new agency, as well as retain limited 
secondary or backup enforcement authority. In addition, the Federal 
Reserve would be authorized to examine a cross section of large and 
small banking organizations jointly with the new agency. FDIC would 
have continued to oversee activities of state banks and thrifts that 
could pose risks to the insurance funds and to resolve failures of 
insured banks. 

* H.R. 1227 (1993).[Footnote 66] This proposal would have consolidated 
OCC and OTS in an independent Federal Bank Agency and aligned 
responsibilities among the new and existing agencies. It also would 
have reduced the multiplicity of regulators to which a single banking 
organization could be subject while avoiding the concentration of 
regulatory power of a single federal agency. The role of the Federal 
Financial Institution Examination Council would have been strengthened; 
it would have seen to the uniformity of examinations, regulation, and 
supervision among the three remaining supervisors. According to a 
Congressional Research Service (CRS) analysis, this proposal would have 
put the Federal Reserve in charge of more than 40 percent of banking 
organization assets, with the rest divided between the new agency and a 
reorganized FDIC.[Footnote 67] 

* 1994 LaWare proposal.[Footnote 68] The LaWare proposal was outlined 
in congressional testimony but never presented as a formal legislative 
proposal, according to Federal Reserve officials. It called for a 
division of responsibilities defined by charter class and a merging of 
OCC and OTS responsibilities. The two primary agencies under the 
proposal would have been an independent Federal Banking Commission and 
the Federal Reserve, which would have supervised all independent state 
banks and depository institutions in any holding company whose lead 
institution was a state-chartered bank. The new agency would have 
supervised all independent national banks and thrifts and depository 
institutions in any banking organization whose lead institution was a 
national bank or thrift. FDIC would not have examined financially 
healthy institutions, but would have been authorized to join in 
examination of problem banking institutions. Based on estimates of 
assets of commercial banks and thrifts performed by CRS, the LaWare 
proposal would have put the new agency in charge of more commercial 
bank assets than the Federal Reserve. 

* 2002 FDIC Chairman proposal. Donald E. Powell, then Chairman of the 
FDIC, proposed to design a new regulatory system that would reflect the 
modern financial services marketplace. Three federal financial services 
regulators would carry out federal supervision: one would be 
responsible for regulating the banking industry, another for the 
securities industry, and a third for insurance companies that choose a 
federal charter. 

* Similarly, proposals have been made to restructure futures and 
securities regulation. In particular, proposals have been made to 
consolidate SEC and CFTC, partly in response to increasing convergence 
in new financial instrument and trading strategies of the securities 
and futures markets. 

Some Lessons May Be Learned from the United Kingdom's FSA Model which 
Emphasizes a Principles-based Approach to Regulation: 

Beginning in 1997, the United Kingdom consolidated its financial 
services regulatory structure, combining nine different regulatory 
bodies, including SROs, into the FSA. While FSA is the sole supervisor 
for all financial services, other government agencies, especially the 
Bank of England and Her Majesty's Treasury, still play some role in the 
regulation and supervision of financial services.[Footnote 69] 

FSA government officials and experts on the model cited important 
changes in the financial services industry as some of the reasons for 
consolidating the regulatory bodies that oversee banking, securities, 
and insurance activities. These included the blurring of the 
distinctions between different kinds of financial services businesses, 
and the growth of large, conglomerate, financial services firms that 
allocate capital and manage risk on a groupwide basis. Other reasons 
for consolidating included some recognition of regulatory weaknesses in 
certain areas and enhancing the United Kingdom's power in the European 
Union[Footnote 70] and other international deliberations.[Footnote 71] 

A number of participants in the Forum believed that lessons can be 
learned from the FSA's single regulator model. Specifically, some 
participants noted that FSA's establishment and use of regulatory goals 
through its principles-based approach to regulation may help to improve 
the effectiveness of the U.S. regulatory structure. In particular, 
several participants suggested adopting a principles-based approach to 
prudential regulation. 

According to FSA, principles-based regulation means, where possible, 
moving away from dictating industry behavior through detailed, 
prescriptive rules and supervisory actions describing how firms should 
operate their business. Instead, the FSA established 11 high-level 
principles that give firms the responsibility to decide how best to 
align their business objectives and processes with regulatory outcomes 
that have been specified. 

Some Forum participants noted that in the United States, such 
principles or goals would work best if established for regulators 
rather than for the industry since rules provide a safe harbor effect 
that principles for industry behavior would not provide. Specifically, 
one participant noted that the litigious business environment in the 
United States makes specificity in rules essential so that firms know 
explicitly what behavior is acceptable in the market. Similarly, 
consumers and investors of financial products in the United States may 
feel most comfortable with an industry regulated by rules since they 
may provide greater assurance that violators will be prosecuted. Some 
participants said principles would be more appropriate in guiding 
prudential or safety and soundness regulation than they would be for 
consumer protection or conduct-of-business regulation. Another 
participant stated that principles-based regulation may provide some 
benefits, but benefits may not result in cost savings and must be 
considered carefully in relation to the U.S. financial regulatory 
system. In fact, most Forum participants stated that a move toward 
principles-based regulation in the United States would have a small or 
moderate impact on lowering regulatory costs. In addition, some 
participants cautioned against wholesale adoption of the FSA's model of 
principles-based regulation noting that the UK's regulatory system had 
not yet been tested by an economic downturn or the failure of a large 
institution at the time of the Forum. Finally, one Forum participant 
noted that the FSA's focus on regulatory outcomes would be a good 
practice to adopt in the United States. 

According to CFTC officials, the agency currently uses a principles- 
based approach to supervising the futures industry. Under the Commodity 
Exchange Act (CEA), exchanges and clearing houses must adhere to a set 
of statutory "core principles." According to CFTC, the agency may set 
out acceptable practices that serve as safe-harbors for the industry's 
compliance with each principle. Conversely, the CEA allows for the 
industry and SROs to formulate their own acceptable practices and 
submit them to the CFTC for approval. CFTC officials noted that, with a 
few exceptions, there are no longer prescriptive regulations that 
dictate exclusive means of compliance; rather, exchanges have the 
choice of following CFTC-approved acceptable practices or adopting 
their own measures for complying with the overarching principle. 

Clear, Consistent Regulatory Goals Are Important Steps to Improve 
Regulatory Effectiveness: 

In addition to suggesting options to modernize the federal financial 
regulatory structure, our prior work also has identified the importance 
of clear and consistent goals for financial regulation. Such goals 
would facilitate consideration of options to modernize the regulatory 
structure. In 1996, we identified the following four goals:[Footnote 

1. Consolidated and comprehensive oversight, with coordinated 
regulation and supervision of individual components. The Basel 
Committee, for example, indicates in its core principles, that "an 
essential element of banking supervision is that supervisors supervise 
the banking group on a consolidated basis, adequately monitoring and, 
as appropriate, applying prudential norms to all aspects of the 
business conducted by the group worldwide."[Footnote 73] Regulators 
would rely upon functional regulators for information and supervision 
of individual components, but remain responsible for ascertaining the 
safety and soundness of the consolidated organization as a whole. 

2. Independence from undue political pressure, balanced by appropriate 
accountability and adequate congressional oversight. Effective 
regulatory oversight would recognize the need to guard against undue 
political influence by incorporating appropriate checks and balances. 

3. Consistent rules, consistently applied for similar activities. 
Effective regulatory oversight would ensure that institutions 
conducting the same lines of business or offering equivalent products 
are generally subject to similar rules, standards, or guidelines for 
those lines of business or products. 

4. Enhanced efficiency and reduced regulatory burden. By establishing 
consolidated, comprehensive, and coordinated oversight and applying 
consistent rules across similar activities, inefficiencies such as 
duplication of effort and regulatory burden caused by reporting similar 
data to multiple regulators, could be eliminated or reduced. 

A review of our work suggests three additional goals that would also be 
important to improve regulatory effectiveness: 

1. Transparency in rule making. Transparency in rule making in an 
environment where multiple regulators bring multiple goals and 
perspectives would entail the maximum possible disclosure regarding the 
intended goals of proposed regulations, the basis for the selection of 
the regulatory approach, and planned evaluation of the implemented 
regulation. This would help reduce industry uncertainty about, and 
possible opposition to, proposed rules and their impact on the 
industry. Transparency also would help to ensure consistent 
expectations of regulators and the industry.[Footnote 74] 

2. Commitment to consumer and investor protection. Currently, consumer 
protection (including consumers as investors) is administered by a 
variety of agencies and can result in differential regulation and the 
inequitable treatment of firms competing in the same market. In 
addition, consumers can suffer if they receive different levels of 
protection when they purchase different products and services from 
different types of financial firms. Equal treatment and equal access to 
credit also are important objectives.[Footnote 75] 

3. Ensuring safety and soundness. Ensuring a safe and sound banking 
system and promoting financial system stability require a balance 
between the need for effective regulatory oversight and the possibility 
that too much oversight could hinder competition. Fulfilling this goal 
also requires developing a system that limits the extension of the 
federal safety net in order to encourage market as well as regulatory 
discipline.[Footnote 76] 

Other organizations have noted the importance of clearly specified 
regulatory goals for regulatory effectiveness. The Basel Committee on 
Banking Supervision developed 25 core principles for effective banking 
supervision that have been used by countries as a benchmark for 
assessing the quality of their supervisory systems and for identifying 
a baseline level of sound supervisory practices. The core principles 
are a framework of minimum standards for sound supervisory practices 
and are considered universally applicable.[Footnote 77] The first of 
the principles states that an effective system of banking supervision 
will have clear responsibilities and objectives for each authority 
involved in the supervision of banks. 

In August 2007, IMF issued a report regarding the findings of its 
consultation with the United States as part of its mission to review 
U.S. economic developments.[Footnote 78] IMF concluded that while the 
U.S. economy continues to show remarkable dynamism and resilience, it 
faced important challenges, such as the need to maintain a robust 
financial system. IMF found that the current structure's multiple 
federal and state regulators overseeing the evolving financial market 
system may limit regulatory effectiveness and slow responses to 
pressing issues. Therefore, IMF suggested the United States increase 
the use of general principles or goals to guide financial regulation. 
According to IMF, general regulatory goals may ease interagency 
coordination and shorten reaction times to industry developments. 

Treasury Has Announced Plans to Consider Regulatory Structure 

The Secretary of the Treasury recently announced an action plan that 
will consider reforms to modernize the U.S. financial regulatory 
structure as part of a plan to maintain the global leadership of U.S. 
capital markets. According to Treasury's press release, the plan seeks 
a modern regulatory structure with improved oversight, increased 
efficiency, reduced overlap, and the ability to adapt to market 
participants' constantly changing strategies and tools.[Footnote 79] 
Treasury officials noted they recognize that designing such a system is 
a long-term endeavor. They said, however, they will seek to propose 
first steps that would begin the process. Treasury intends to publish 
the result of its study in early 2008. 

Agency Comments and Our Evaluation: 

We provided the Secretary of the Treasury and the heads of CFTC, the 
Federal Reserve, FDIC, NCUA, OCC, OTS, and SEC with drafts of this 
report for their comment. We received written comments from the 
Chairman of the Board of Governors of the Federal Reserve System and 
the Chairman of NCUA who generally agreed with the thrust of our 
report; these are reprinted in appendixes II and III. In particular, 
the Federal Reserve concurred with GAO's emphasis on periodically 
reviewing the financial regulatory framework for potential 
modifications and the importance of continued federal oversight of 
financial services firms on a consolidated, group-wide basis. We also 
received technical comments from the staffs at the Treasury, the 
Federal Reserve, CFTC, FDIC, NCUA, OCC, OTS, and SEC that we have 
incorporated in the report. 

We are sending copies of this report to other interested congressional 
committees and to the Secretary of the Treasury, the Chairman of the 
Board of Governors of the Federal Reserve System, the Chairman of the 
Federal Deposit Insurance Corporation, the Comptroller of the Currency, 
the Chairman of the Securities Exchange Commission, the Chairman of the 
Commodities and Futures Trading Commission, the Director of the Office 
of Thrift Supervision, and the Chairman of the National Credit Union 
Administration. We will also make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at [hyperlink,]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-8678 or Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors are acknowledged in 
appendix IV. 

Signed by: 

Yvonne Jones: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Participants in the June 11, 2007, Comptroller General's 

Table: Participants in the June 11, 2007, Comptroller General's Forum: 

Moderator: David M. Walker; 
Title: Comptroller General: 
Organization: U.S. Government Accountability Office. 

Participant: Wayne Abernathy; 
Title: Executive; 
Organization: American Bankers Association. 

Participant: Scott Albinson; 
Title: Managing Director; 
Organization: J.P. Morgan Chase. 

Participant: Konrad Alt; 
Title: Managing Director; 
Organization: Promontory Financial Group. 

Participant: John Bowman; 
Title: Deputy Director and Chief Counsel; 
Organization: Office of Thrift Supervision. 

Participant: Rickard Carnell; 
Title: Associate Professor of Law; 
Organization: Fordham University School of Law. 

Participant: Gerald Corrigan; 
Title: Managing Director; 
Organization: Goldman, Sachs & Co.. 

Participant: John Damgard; 
Title: President; 
Organization: Futures Industry Association. 

Participant: Peter Fisher; 
Title: Chairman; 
Organization: BlackRock Asia. 

Participant: Jeffrey Gillespie; 
Title: Deputy Chief Counsel; 
Organization: Office of the Comptroller of the Currency. 

Title: Robert Glauber; 
Title: Visiting Professor; 
Organization: Harvard Law School. 

Participant: Carrie Hunt; 
Title: Sr. Counsel & Director, Regulatory Affairs; 
Organization: National Association of Federal Credit Unions. 

Participant: Marc Lackritz; 
Title: President and CEO; 
Organization: Securities Industry & Financial Markets Association. 

Participant: Walter Lukken; 
Title: Acting Chairman; 
Organization: Commodity Futures Trading Commission. 

Participant: Dave Marquis; 
Title: Director, Examination & Insurance; 
Organization: National Credit Union Administration. 

Participant: Michael Menzies; 
Title: Vice Chair; 
Organization: Independent Community Bankers of America. 

Participant: Art Murton; 
Title: Director, Insurance and Research; 
Organization: Federal Deposit Insurance Corporation. 

Participant: Vincent Reinhart; 
Title: Director, Division of Monetary Affairs; 
Organization: Board of Governors of the Federal Reserve System. 

Participant: Thomas Russo; 
Title: Vice Chair and Chief Legal Officer; 
Organization: Lehman Brothers. 

Participant: Mary Schapiro; 
Title: Chairman and CEO; 
Organization: NASD. 

Participant: William Seidman; 
Title: Chief Commentator; 
Organization: CNBC. 

Participant: Erik Sirri; 
Title: Director, Market Regulation; 
Organization: Securities and Exchange Commission. 

Participant: Mike Stevens; 
Title: Sr. Vice President, Regulatory Policy; 
Organization: Conference of State Bank Supervisors. 

Participant: Peter Wallison; 
Title: Senior Fellow; 
Organization: American Enterprise Institute. 

Participant: Julie Williams; 
Title: First Senior Deputy Comptroller & Chief Counsel; 
Organization: Office of the Comptroller of the Currency. 

Note: Organizational affiliation for identification purposes only. 

[End of table] 

[End of section] 

Appendix II: Comments from the Chairman of the Board of Governors of 
the Federal Reserve System: 

Board Of Governors: 
Of The: 
Federal Reserve System: 
Washington, D.C. 20551: 

Ben S. Bernanke: 
September 28, 2007: 

Mr. Richard J. Hillman: 
Managing Director: 
Financial Markets and Community Investment: 
Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Hillman: 

The Federal Reserve appreciates the opportunity to comment on a draft 
of the GAO's report on the regulatory structure for financial services 
and trends in the financial services industry and (GAO-08-32). The 
report draws on several reports previously prepared by the GAO as well 
as the perspectives of participants in a forum hosted by the 
Comptroller General on June 11, 2007. This forum, in which the Federal 
Reserve was pleased to participate, included representatives of various 
financial services regulatory authorities, financial services 
organizations and others. 

As your report notes, the current regulatory structure for financial 
services in the United States is somewhat complex. This is due in part 
to Congress' decision, which was reviewed and reaffirmed in the Gramm-
Leach Bliley Act of 1999, to build on the well established, 
"functional" regulatory structures in place for the banking, securities 
and commodity sectors. This framework recognizes that the different 
financial services sectors are governed by differing statutory 
requirements, builds on the expertise of the relevant agency or 
agencies in each sector, and helps ensure that regulatory requirements 
and burdens remain tailored to the relevant sectors. Importantly, the 
current framework also provides for firms that control an insured 
depository institution to be subject to consolidated or "umbrella" 
supervision by a Federal agency.[Footnote 80] As your report notes, the 
current regulatory framework has contributed to the development of U.S. 
financial markets and overall economic growth and stability. 

We agree that it is useful to periodically review ways of enhancing 
this regulatory framework to determine if, in light of the ever-
changing financial services marketplace, modifications would allow the 
system to achieve its fundamental goals more effectively, efficiently 
and consistently. Any potential changes should be carefully evaluated 
and consistent with the core public policy objectives of financial 
regulation and supervision. 

As I have noted previously, these objectives in the broadest sense are 
financial stability, investor and consumer protection, and market 
integrity. On a slightly more granular level, achieving these 
objectives requires laws, regulations and coordinated actions to 
protect the safety and soundness of depository institutions that have 
access to the Federal safety net (deposit insurance and access to the 
Federal Reserve's discount window and payments systems); promote 
financial innovation, evolution and competition; limit the potential 
for explicit or implicit expansion of the Federal safety net; promote 
market discipline; and provide consumers of financial products and 
services appropriate protections.

Recent market events highlight the importance of financial stability, 
the critical role of the Federal Reserve in protecting against 
financial crisis and systemic risks, and the important synergies 
between the Federal Reserve's supervisory and financial stability 
responsibilities. The Federal Reserve's supervision and regulation of 
banking organizations provide the Federal Reserve with information, 
expertise and powers that are highly valuable in carrying out our 
responsibilities for deterring and managing financial crises, 
overseeing the payments system, acting as a liquidity provider through 
the discount window and conducting monetary policy. 

We also agree that changes in the financial services marketplace make 
it even more important for firms that control an insured depository 
institution to be overseen by a Federal agency on a consolidated or 
group-wide basis. As your report notes, the Federal Reserve oversees a 
substantial share of the financial services industry in its role as 
consolidated supervisor for all bank holding companies (including 
financial holding companies formed under the Gramm-Leach-Bliley Act). 
As the GAO previously has recognized, the Federal Reserve has a well-
developed, systematic and risk-focused program for the supervision of 
bank holding companies on a consolidated basis. 

In its role as consolidated or "umbrella" supervisor for bank holding 
companies, the Federal Reserve collaborates extensively with other bank 
supervisors and functional regulators. We have worked hard to establish 
the requisite information sharing agreements and protocols that make 
systematic collaboration possible and rely, to the fullest extent 
possible, on the examination and other supervisory work conducted by 
the primary bank and functional supervisors of a bank holding company's 
subsidiaries in assessing the risks of the organization as a whole. 
Through these efforts, as well as through our participation in the 
Federal Financial Institutions Examination Council and the President's 
Working Group on Financial Markets, we seek to advance the important 
goals of providing consistent supervision to similarly situated 
organizations in a manner that promotes financial stability, market 
efficiency, consumer protection and the other goals of Federal 
supervision, while at the same time respecting the individual statutory 
missions and responsibilities of all involved agencies.[Footnote 81] 
I'm pleased to note that we recently instituted a variety of changes to 
the Federal Reserve's Quality Management Framework for Reserve Banks to 
further enhance the consistency in our supervisory processes and 
products.[Footnote 82] The Federal Reserve will continue to look for 
opportunities to enhance our supervisory program for banking 
organizations and to collaborate with other agencies and Congress to 
bring greater consistency to the supervision of organizations that 
control an insured depository institution. 

Federal Reserve staff separately has provided GAO staff with technical 
and correcting comments on the draft report. We hope that these 
comments were helpful. 


Signed by: 

cc: James M. McDermott, GAO: 

[End of section] 

Appendix III: Comments from the Chairman of the National Credit Union 

National Credit Union Administration: 
Office of the Chairman: 

September 25, 2007: 

United States Government Accountability Office: 
James McDermott: 
Assistant Director, Financial Markets And Community Investment: 
Washington, D.C. 20548: 

Dear Mr. McDermott: 

I am responding to your September 11, 2007 letter, which contained the 
U.S. Government Accountability Office's (GAO) draft report entitled 
Financial Regulation: Industry Trends Continue to Challenge the Federal 
Regulatory Structure (GAO-08- 32). We originally provided written 
comments to GAO in April 2007 prior to the Comptroller General's Forum 
held in June 2007 on this subject matter and also met with GAO staff on 
September 5, 2007. 

We appreciate the opportunity to comment on industry trends given the 
current federal regulatory structure in the United States. We do not 
have any additional comments than those already provided both verbally 
and in writing to GAO. 

If you have any additional questions, please contact me. 


Signed by: 

JoAnn Johnson: 

1775 Duke Street: 
Alexandria, VA: 

[End of section] 

Appendix IV GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Yvonne Jones (202) 512-8678 or 

Staff Acknowledgments: 

In addition to the individual named above, James McDermott, Assistant 
Director; Emily Chalmers; Tiffani Humble; Clarette Kim; Robert E. Lee; 
and Marc Molino made key contributions to this report. 

[End of section] 

Related GAO Products: 

Credit Unions: Greater Transparency Needed on Who Credit Unions Serve 
and on Senior Executive Compensation Arrangements, GAO-07-29. 
Washington, D.C.: November 30, 2006. 

Industrial Loan Corporations: Recent Asset Growth and Commercial 
Interest Highlight Differences in Regulatory Authority, GAO-06-961T. 
Washington, D.C.: July 12, 2006. 

Bank Secrecy Act: Opportunities Exist for FinCEN and the Banking 
Regulators to further Strengthen the Framework for Consistent BSA 
Oversight, GAO-06-386. Washington, D.C.: April 28, 2006. 

Sarbanes-Oxley Act: Consideration of Key Principles Needed in 
Addressing Implementation for Smaller Public Companies, GAO-06-361. 
Washington, D.C.: April 13, 2006. 

Mutual Fund Industry: SEC's Revised Examination Approach Offers 
Potential Benefits, but Significant Oversight Challenges Remain, GAO- 
05-415. Washington, D.C.: August 17, 2005. 

Mutual Fund Trading Abuses: Lessons Can Be Learned from SEC Not Having 
Detected Violations at an Earlier Stage, GAO-05-313. Washington, D.C.: 
April 20, 2005. 

Credit Unions: Financial Condition Has Improved, but Opportunities 
Exist to Enhance Oversight and Share Insurance Management, GAO-04-91. 
Washington, D.C.: October 27, 2003. 

Securities Markets: Competition and Multiple Regulators Heighten 
Concerns about Self-Regulation, GAO-02-362. Washington, D.C.: May 3, 

Large Bank Mergers: Fair Lending Review Could be Enhanced with Better 
Coordination, GAO/GGD-00-16, Washington, D.C.: November 3, 1999. 

Bank Oversight Structure: U.S. and Foreign Experience May Offer Lessons 
for Modernizing U.S. Structure, GAO/GGD-97-23. Washington, D.C.: 
November 20, 1996. 


[1] The scope of our work includes regulatory oversight of the banking, 
securities, and futures industry sectors by the federal government. The 
federal financial regulators in the scope of our work are: the Federal 
Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the 
Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), 
National Credit Union Administration (NCUA), Securities and Exchange 
Commission (SEC), and Commodity Futures Trading Commission (CFTC). The 
scope of our work excludes government-sponsored enterprises such as 
Fannie Mae and Freddie Mac; state financial regulatory agencies, 
including those in the insurance sector; the securities and futures 
industry SROs, and the Public Company Accounting Oversight Board. 

[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[3] International Monetary Fund, United States: 2007 Article IV 
Consultation--Staff Report: Staff Statement; and Public Information 
Notice on the Executive Board Discussion, IMF Country Report No. 07/264 
(Washington, D.C., August 2007). 

[4] Financial Services Regulatory Relief Act of 2006, Pub. L. No. 109- 
351, § 1002, 120 Stat. 1966, 2009-2010 (Oct. 13, 2006). 

[5] By "costs and benefits of financial regulation in general," we mean 
to include the measurement of the costs and benefits of financial 
regulation to firms, regulators, and the overall economy. 

[6] For more information on ILCs, see GAO, Industrial Loan 
Corporations: Recent Asset Growth and Commercial Interest Highlight 
Differences in Regulatory Authority, GAO-05-621 (Washington, D.C.: 
Sept. 15, 2005). 

[7] Recently, the two largest securities industry SROs merged into one 
SRO known as the Financial Industry Regulatory Authority (FINRA) which 
is responsible for overseeing nearly 5,100 brokerage firms. 

[8] For more information on securities and banking regulators, see GAO, 
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. 
Regulatory Structure, GAO-05-61 (Washington D.C.: Oct. 6, 2004). 

[9] See GAO-05-61, 9. 

[10] GAO, Reexamining Regulations: Opportunities Exist to Improve 
Effectiveness and Transparency of Retrospective Reviews, GAO-07-791 
(Washington, D.C., Jul. 16, 2007). 

[11] Gregory Elliehausen, "The Cost of Bank Regulation: A Review of the 
Evidence," Federal Reserve Staff Study. Washington, D.C., April 1998, 
29. Earlier, we concluded that industry estimates of regulatory 
compliance costs for banks were not reliable because of methodological 
deficiencies. See GAO, Regulatory Burden: Recent Studies, Industry 
Issues, and Agency Initiatives, GAO/GGD-94-28 (Washington, D.C.: Dec. 
13, 1993). 

[12] GAO, Risk-Based Capital: Bank Regulators Need to Improve 
Transparency and Overcome Impediments to Finalizing the Proposed Basel 
II Framework, GAO-07-253 (Washington, D.C.: Feb. 2007). 

[13] Deloitte, The Cost of Regulation Study, A report commissioned by 
the Financial Services Authority and the Financial Services 
Practitioner Panel, (London, June 28, 2006). 

[14] U.S. Chamber of Commerce, Report and Recommendations of the 
Commission on the Regulation of U.S. Capital Markets in the 21st 
Century, March 2007; McKinsey and Company, Sustaining New York's and 
the US' Global Financial Services Leadership, a report commissioned by 
New York City Mayor Michael Bloomberg and New York Senator Charles 
Schumer. January 22, 2007; Interim Report of the Committee on Capital 
Markets Regulation, November 30, 2006. 

[15] U.S. Chamber of Commerce, Report and Recommendations of the 
Commission on the Regulation of U.S. Capital Markets in the 21st 
Century, March 2007. 

[16] GAO, Financial Market Regulation: Benefits and Risks of Merging 
SEC and CFTC, GAO/T-GGD-95-153 (Washington, D.C.: May 3, 1995). 

[17] As of October 5, 2007, this report had not been released. 

[18] Call reports provide financial and structural information, such as 
ownership, for FDIC-insured depository institutions. 

[19] 72 Fed. Reg. 36550 (July 3, 2007). 

[20] We currently have ongoing work in this area to review the 
resources required for banks to file such reports. 

[21] Agencies accomplish this task, in part, by conducting what GAO has 
referred to as "retrospective reviews" to determine the effectiveness 
of a regulation and its implementation. See GAO, Reexamining 
Regulations: Opportunities Exist to Improve Effectiveness and 
Transparency of Retrospective Reviews, GAO-07-791 (Washington, D.C.: 
July 2007). 

[22] The London Stock Exchange created AIM to offer smaller companies 
from throughout the world and in any industry the opportunity to list 
on its exchange and be subject to less regulation. Listing requirements 
do not require particular financial track records, a trading history, 
or minimum requirements for size or number of shareholders. Companies 
listed on AIM today represent many sizes and industries. 

[23] Section 3 of the Regulatory Flexibility Act of 1980 (Pub. L. No. 
96-354, 94 Stat. 1164, 1169 (1980) (codified at 5 U.S.C. § 610) 
requires agencies to periodically review all rules issued by the 
agency, within 10 years of their adoption as final rules, that have or 
will have a "significant economic impact upon a substantial number of 
small entities." The purpose of these reviews is to determine whether 
such rules should be continued without change, or should be amended or 
rescinded, consistent with the stated objectives of applicable 
statutes, to minimize any significant economic impact of the rules upon 
a substantial number of such small entities. These reviews are referred 
to as Section 610 reviews. 

[24] GAO-07-791. 

[25] Charter choice is influenced by many factors, including the size 
and complexity of banking operations, an institution's business needs, 
and regulatory expertise tailored to the scale of the bank's 
operations. See GAO, OCC Preemption Rules: OCC Should Further Clarify 
the Applicability of State Consumer Protection Laws to National Banks, 
GAO-06-387 (Washington, D.C.: Apr. 28, 2006), 25-28. 

[26] GAO-05-61, 114. 

[27] These trends are discussed in greater detail in GAO-05-61, ch. 2. 

[28] The number of ILCs actually grew during the period 1996-2006; 
however, they represent a very small percent of total deposits in the 
banking industry; insured deposits in ILCs represented less than 3 
percent of the total estimated deposits in 2006. 

[29] Assets, though an imperfect measure of increased growth in the 
securities industry, tend to be more stable than revenues and show a 
clearer picture of the size of the industry over time. This figure 
includes total assets and not assets under management. Revenues, 
another measure commonly used to reflect the growth of the securities 
industry, increased by about 61 percent over this same period from 
about $172 billion to $437 billion. 

[30] GAO-05-61, 46-47. 

[31] Gianni DeNicolo, Philip Bartholomew, Jahanara Zaman, and Mary 
Zephirin, "Bank Consolidation, Internationalization, and 
Conglomeration: Trends and Implications for Financial Risk" (IMF 
Working Paper 03/158, Washington, D.C., July 2003). 

[32] GAO-05-61. 

[33] IKB Deutsche Industriebank, PNB Paribas, and other foreign banks 
experienced losses due to defaults on subprime mortgages in the United 
States, according to news reports. 

[34] According to SEC filings, 51.3 percent of Goldman Sachs revenues 
in the first half of 2007 were earned in Asia, Europe, the Middle East, 
and Africa. Revenues earned in the Americas were 48.7 percent, most of 
which was earned in the United States. 

[35] Citigroup, Form 10-K for 2006, filed with SEC; p. 5. 

[36] GAO, Credit Derivatives: Confirmation Backlogs Increased Dealers' 
Operational Risks, but Were Successfully Addressed after Joint 
Regulatory Action, GAO-07-716 (Washington, D.C.: June 13, 2007). 

[37] For enterprises engaged in commercial activities, consolidated 
supervision also may refer to supervision of the enterprise 
consolidated at the highest-level holding company engaged in financial 
activities. For foreign banking firms that operate in the United States 
without a U.S. holding company, consolidated supervision may refer to 
the oversight of all U.S. activities of the foreign firm. 

[38] GAO, Financial Market Regulation: Agencies Engaged in Consolidated 
Supervision Can Strengthen Performance Measurement and Collaboration, 
GAO-07-154 (Washington, D.C.: Mar. 15, 2007). 

[39] GAO-07-154, 39, 48-51. 

[40] GAO, Financial Market Regulation: Agencies Engaged in Consolidated 
Supervision Can Strengthen Performance Measurement and Collaboration, 
GAO-07-154 (Washington, D.C.: March 15, 2007). 

[41] See GAO-05-621. In most respects, ILCs may engage in the same 
activities as other depository institutions insured by the FDIC and 
thus may offer a full range of loans, including consumer, commercial 
and residential real estate, small business, and subprime. ILCs are 
also subject to the same federal safety and soundness safeguards and 
consumer protection laws that apply to other FDIC-insured institutions. 

[42] GAO found that nonfinancial, commercial firms in the automobile, 
retail, and energy industries, among others, own ILCs, many of which 
directly supported their parent's commercial activities. 

[43] 72 Fed. Reg. 5290 (Feb. 5, 2007). 

[44] In addition to the risk-based capital requirement, U.S. banks must 
also satisfy a leverage requirement that defines a minimum level for a 
simple ratio of specified components of total capital (those defined as 
Tier I under current rules) to on-balance sheet assets. See GAO-07-253, 
32 ff. 

[45] See GAO-07-253, 77-79. 

[46] GAO, OCC Preemption Rules: OCC Should Further Clarify the 
Applicability of State Consumer Protection Laws to National Banks, GAO-
06-387 (Washington, D.C.: Apr. 28, 2006). 

[47] Watters v. Wachovia, N.A., 127 S. Ct. 1559 (Apr. 17, 2007). 

[48] For example, since their introduction in the early 1990s, credit 
derivatives surpassed a notional amount of $34 trillion at year-end 
2006. See GAO-07-716. 

[49] See, for example, GAO, CFTC/SEC Enforcement Programs: Status and 
Potential Impact of a Merger, GAO/T-GGD-96-36 (Washington, D.C.: Oct. 
25, 1995). 

[50] GAO, CFTC and SEC: Issues Related to the Shad-Johnson 
Jurisdictional Accord, GAO/GGD-00-89 (Washington, D.C.: Apr. 6, 2000). 

[51] GAO-07-716. 

[52] GAO, Bank Secrecy Act: Opportunities Exist for FinCEN and the 
Banking Regulators to Further Strengthen the Framework for Consistent 
BSA Oversight, GAO-06-386 (Washington, D.C.: Apr. 28, 2006). 

[53] See GAO-05-61, 97-98. 

[54] See GAO, Financial Regulatory Coordination: The Role and 
Functioning of the President's Working Group, GAO/GGD-00-46 
(Washington, D.C.: Jan. 2000). 

[55] GAO/GGD-04-46, 3. 

[56] GAO-07-154. 

[57] GAO/GGD-00-46. 

[58] GAO, Long-Term Capital Management: Regulators Need to Focus 
Greater Attention on Systemic Risk, GAO/GGD-00-3, (Washington, D.C.: 
Oct. 29, 1999). 

[59] GAO, Potential Terrorist Attacks: Additional Actions Needed to 
Better Prepare Critical Financial Market Participants, GAO-03-251 
(Washington, D.C.: Feb. 12, 2003). 

[60] GAO, Better Information Sharing among Financial Services 
Regulators Could Improve Protections for Consumers, GAO-04-882R 
(Washington, D.C.: June 29, 2004). 

[61] We have noted limitations on effectively planning strategies that 
cut across regulatory agencies. See GAO-05-61. 

[62] GAO-05-61. 

[63] GAO-05-61. 

[64] GAO-05-61. 

[65] This proposal was outlined in the statement of the Honorable Lloyd 
Bentsen, Secretary of the Treasury, before the Committee on Banking, 
Housing, and Urban Affairs of the U.S. Senate (Mar. 1, 1994). 

[66] The Bank Regulatory Consolidation and Reform Act of 1993, H.R. 
1227, 103rd Cong. (1993). 

[67] CRS, Bank Regulatory Agency Consolidation Proposals: A Structural 
Analysis (Washington, D.C., Mar. 18, 1994). 

[68] This proposal was outlined in the statement of Alan Greenspan, 
Chairman, Board of Governors of the Federal Reserve System, before the 
Committee on Banking, Housing, and Urban Affairs of the U.S. Senate 
(Mar. 2, 1994). 

[69] While FSA is responsible for supervision of financial entities, 
the Bank of England retains primary responsibility for the overall 
stability of the financial system. It retains lender-of-last-resort 
responsibilities but must consult with the Treasury if taxpayers are at 
risk. High-level representatives from the three agencies meet monthly 
to discuss issues of mutual concern. See GAO-05-61, 67. 

[70] The European Union (EU) is a treaty-based organization of European 
countries in which countries cede some of their sovereignty so that 
decisions on specific matters of joint interest can be made 
democratically at the European level. GAO-05-61, 62. 

[71] In 1996, Japan also consolidated and modified its financial 
services regulatory structure in response to persistent problems in 
that sector. A single regulator, the Financial Services Agency (Japan- 
FSA), is responsible for supervising the entire financial services 
industry. Since its creation, Japan-FSA has overseen the mergers of 
several large banks and has reported progress in addressing the issue 
of nonperforming loans held by Japanese banks. In the review of Japan- 
FSA issued in 2003, however, IMF raised questions about the 
independence and enforcement powers of the agency. 

[72] GAO, Bank Oversight: Fundamental Principles for Modernizing the 
U.S. Structure, GAO/T-GGD-96-117 (Washington, D.C.: May 2, 1996). 

[73] Basel Committee on Banking Supervision, Core Principles for 
Effective Bank Supervision. (Basel, Switzerland, October 2006), 5. 

[74] See, GAO-07-791. 

[75] GAO, OCC Preemption Rulemaking: Opportunities Existed to Enhance 
the Consultative Efforts and Better Document the Rulemaking Process, 
GAO-06-8 (Washington, D.C.: Oct. 17, 2005). 

[76] See GAO-05-61. 

[77] The Basel Committee's core principles for effective banking 
supervision are conceived as a voluntary framework of minimum standards 
for sound supervisory practices; national authorities are free to put 
in place supplementary measures that they deem necessary to achieve 
effective supervision in their jurisdictions. In 2006, the Committee 
revised the core principles, in part, to enhance consistency between 
the core principles and the corresponding standards for securities and 
insurance. While the Committee recognized there may be legitimate 
reasons for differences in core principles within each sector, the 
changes recognized the importance of consistency across sectors. 

[78] IMF undertakes missions, in most cases to member countries, as 
part of regular (usually annual) consultations under article IV of 
IMF's Articles of Agreement, in the context of a request to use IMF 
resources (borrow from IMF), as part of discussions of staff-monitored 
programs, and as part of other staff reviews of economic developments. 

[79] Department of the Treasury, Paulson Announces Next Steps to 
Bolster U.S. Markets' Global Competitiveness. (Washington, D.C., June 
27, 2007.) 

[80] Your report also recognizes that the corporate owners of 
industrial loan companies (ILCs) currently are not subject to the same 
consolidated supervisory framework as bank holding companies and that, 
due to these differences, ILCs in a holding company structure may pose 
more risk to the deposit insurance fund. 

[81] The draft report notes one instance where a bank holding company 
informed the GAO that it initially had received conflicting views from 
the Federal Reserve and the Office of the Comptroller of the Currency 
("OCC"), the primary supervisor of the holding company's lead bank 
subsidiary, concerning the adequacy of the organization's business 
continuity plans. However, in that case, the Federal Reserve and OCC 
worked cooperatively to develop a uniform view regarding this important 
aspect of the organization's risk management systems and controls. This 
consistent view was formally communicated in writing by both agencies 
to the organization, whose senior management concurred with these 

[82] See Revised Guidelines for Reserve Bank Quality Management 
Frameworks, AD Letter 07-23/CA Admin Letter 07-11 (Aug. 30, 2007).

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