Justice and Law Enforcement:

Separation of Banking and Commerce

OCE/GGD-97-61R: Published: Mar 17, 1997. Publicly Released: Mar 27, 1997.

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Pursuant to a congressional request, GAO: (1) reviewed the literature regarding the potential benefits and risks of eliminating the current separation of banking related activities and commerce; (2) assessed the extent of the empirical support for taking such action; and (3) provided its views, and any recommendations that it might have, on the need for consolidated supervision of bank holding companies.

GAO noted that: (1) GAO's review of existing literature found that the potential benefits of eliminating the current separation of banking and commerce generally lacked empirical support and that most such benefits could be realized through other means; (2) GAO's review of these studies and its own prior work also indicated that there are risks associated with conglomerations of banks and commercial firms that could affect the safety and soundness of the financial system, the deposit insurance funds, and consumers and taxpayers; (3) the exact magnitudes of such risks, however, are uncertain and depend, in part, upon the effectiveness of regulatory and legislative safeguards; (4) moreover, these benefits and risks may be affected by the rapid changes that are occurring in the industry today; (5) although Congress must ultimately make its own policy judgment, GAO urges that Congress proceed cautiously if it decides to relax the current restrictions; (6) if Congress does decide to relax these restrictions, the associated risks could be reduced by doing so in an incremental manner; (7) regarding supervision of bank hold companies, GAO has stated in previous reports and congressional testimony that financial services holding companies should be subject to comprehensive regulation on both a functional and consolidated basis; (8) based on GAO's extensive work assessing the severe problems that affected thrifts and banks in the 1980s and early 1990s and evaluating the effectiveness of financial institution examination and supervision, GAO believes an umbrella supervisory authority needs to exist to adequately assess how risks to insured depository institutions may be affected by risks in the other components of a holding company structure; and (9) if the current separation between banking related activities and commerce is eliminated, having an umbrella supervisory authority would thus imply an extension of some regulatory supervision to commercial firms.

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