Financial Regulation:

Industry Changes Prompt Need to Reconsider U.S. Regulatory Structure

GAO-05-61: Published: Oct 6, 2004. Publicly Released: Nov 8, 2004.

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In light of the passage of the 1999 Gramm-Leach-Bliley Act and increased competition within the financial services industry at home and abroad, GAO was asked to report on the current state of the U.S. financial services regulatory structure. This report describes the changes to the financial services industry, focusing on banking, securities, futures, and insurance; the structure of the U.S. and other regulatory systems; changes in regulatory and supervisory approaches; efforts to foster communication and cooperation among U.S. and other regulators; and the strengths and weaknesses of the current regulatory structure.

The financial services industry has changed significantly over the last several decades. Firms are now 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, both for individual institutions and for the regulatory system as a whole. Actions that are being taken to harmonize regulations across countries, especially the Basel Accords and European Union Financial Services Action Plan, are also affecting U.S. firms and regulators. While the financial services industry and the international regulatory framework have changed, the regulatory structure for overseeing the U.S. financial services industry has not. Specialized regulators still oversee separate functions--banking, securities, futures, and insurance--and while some regulators do oversee complex institutions at the holding company level, they generally rely on functional regulators for information about the activities of subsidiaries. In addition, no one agency or mechanism looks at risks that cross markets or industry segments or at the system and its risks as a whole. Although a number of proposals for changing the U.S. regulatory system have been put forth, the United States has chosen not to consolidate its regulatory structure. At the same time, some industrial countries--notably the United Kingdom--have consolidated their financial regulatory structures, partly in response to industry changes. Absent fundamental change in the overall regulatory structure, U.S. regulators have initiated some changes in their regulatory approaches. For example, starting with large, complex institutions, bank regulators, in the 1990s, sought to make their supervision more efficient and effective by focusing on the areas of highest risk. And partly in response to changes in European Union requirements, SEC has issued rules to provide consolidated supervision of certain internationally active securities firms on a voluntary basis. Regulators are also making efforts to communicate in national and multinational forums, but efforts to cooperate have not fully addressed the need to monitor risks across markets, industry segments, and national borders. And from time to time regulators engage in jurisdictional disputes that can distract them from focusing on their primary missions. GAO found that the U.S. regulatory structure worked well on some levels but not on others. The strength and vitality of the U.S. financial services industry demonstrate that the regulatory structure has not failed. But some have questioned whether a fragmented regulatory system is appropriate in today's environment, particularly with large, complex firms managing their risks on a consolidated basis. While the structure of the agencies alone cannot ensure that regulators achieve their goals--agencies also need the right people, tools, and policies and procedures--it can hinder or facilitate their efforts to provide consistent, comprehensive regulation that protects consumers and enhances the delivery of financial services.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: While maintaining sector expertise and ensuring that financial institutions comply with the law, Congress may want to consider some consolidation or modification of the existing regulatory structure to (1) better address the risks posed by large, complex, internationally active firms and their consolidated risk management approaches; (2) promote competition domestically and internationally; and (3) contain systemic risk. If so, our work has identified several options that Congress may wish to consider (1) consolidating the regulatory structure within the "functional" areas; (2) moving to a regulatory structure based on a regulation by objective or twin peaks model; (3) combining all financial regulators into a single entity; or (4) creating or authorizing a single entity to oversee all large, complex, internationally active firms, while leaving the rest of the structure in place. If Congress does wish to change these or other options, it may want to ensure that legislative goals are clearly set out for any changed regulatory structure and that the agencies affected by any change are given clear direction on the priorities that should be set for achieving these goals. In addition, any change in the regulatory structure would entail changing laws that currently govern financial services oversight to conform to the new structure.

    Status: Closed - Implemented

    Comments: On June 18, 2009, President Obama announced a package of reforms aimed at changing how the federal government oversees the financial markets and participants. One of the proposals was to eliminate the federal thrift charter and create a National Bank Supervisor that will conduct prudential supervision and regulation of federally chartered depository institutions and federal branches and agencies of foreign banks. Under this plan, the Federal Reserve will gain the power to oversee any large firm that poses a threat to the financial system and require these firms to hold more reserves. Also, the Treasury could appoint FDIC to orderly liquidate bank holding companies, in addition to its current authority to liquidate banks. The plan also entertains the concept of a systemic risk regulator. In June and July, House Financial Services held a series of hearings on these proposals. Senate Banking has announced it will also hold hearings later in the year. As such, Congress is considering some consolidation or modification of the existing regulatory structure.

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