Changes in the Financial Services Industry and Their Impact on Federal Regulation

GAO discussed how the financial services industry is changing and what the government's role with respect to those changes should be. The changes occurring are the latest events in the historical development of the financial services industry. Congress designed the legislation of the 1930's for a financial system which, in one important respect, differs from today's system. The basic deposit insurance, public disclosure, and regulatory requirements designed 50 years ago assume separate and distinct deposit and investment industries. Congress stated its desire to keep banking separate from other lines-of-business by prohibiting federally chartered banks and Federal Reserve member banks from engaging in activities such as securities underwriting. Beginning in the late 1970's, traditional financial institutions and commercial nonbanking firms have made incursions into each others' lines-of-business, blurring the distinctions between the formerly separate industries. These industry changes are taking place in spite of existing laws and regulations. Various methods are being employed to avoid prohibitions. Furthermore, not all of the restrictions on federally chartered banks apply to institutions with state charters. The Glass-Steagall Act prohibits national banks and other Federal Reserve member banks from underwriting securities. GAO stated that it is important that Congress ascertain the direction in which the financial services industry is headed, assess the need for changing the restrictions now imposed on the market, determine the protection to be offered depositors and investors, and carefully evaluate alternatives for improving federal financial services regulations.