From the U.S. Government Accountability Office, www.gao.gov Transcript for: Financial Regulatory Structure Description: Audio interview by GAO staff with Lawrance Evans, Director, Financial Markets and Community Investment Related GAO Work: GAO-16-175: Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness Released: March 2016 [ Background Music ] [Narrator:] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's March 2016. Dodd-Frank was neither the first nor the last time laws have been passed to try to fix the nation's financial sector. Over the past 150 years, the U.S. financial regulatory structure has evolved in response to various financial crises. And financial markets themselves have evolved from ticker-tape to e-trading, to more complex financial products which require new ways to keep track of the markets. A team led by Lawrance Evans, a director in GAO's Financial Markets and Community Investments team, recently reviewed the nation's financial regulatory structure with an eye toward any fragmentation or overlap. GAO's Jacques Arsenault sat down with Lawrance to talk about what they found. [ Jacques Arsenault: ] Can you give me a sense of what we mean when we talk about the U.S. financial regulatory structure? What does that include? [ Lawrance Evans: ] Good question. So the financial services industry encompasses a wide range of financial activities, institutions, and markets such as banking, insurance, securities, and it's the responsibility for overseeing that sector of the economy falls on a large number of regulators. Literally over 100 different state financial regulators, about a dozen federal financial regulators, as well as some self-regulatory entities such as the New York Stock Exchange. [ Jacques Arsenault: ] So with all these different sectors and regulatory agencies, how do we make sense of whether the system is working? [ Lawrance Evans: ] So there's two ways one might do this. The first way is to think about what the ideal system -- you know it will be one that provided for consistent, effective oversight and then compare that to what exists today and then identify what some of the challenges would be. Another way is just to be descriptive and identify all the negative conditions that exist, and we did both of those in the report. [ Jacques Arsenault: ] So then with all these pieces of the financial sector and all these different regulators, how do we make sense of whether it's working or where the gaps are? [ Lawrance Evans: ] Another good question and for sure it is working so the United States has the most vibrant, efficient, safe financial markets in the world and it attracts foreign capital from all over the world. But to bend the question a little bit and ask well, could it be improved, or is it the structure we would have coherently designed? All right, so it's important to note this system or this structure evolved piecemeal over 100 years or more in response to financial crises and innovations and developments in financial markets. So it's worth stepping back to say what would the ideal structure look like and GAO has done that. And it has an idea of what characteristics a financial framework should have, you know it should offer effective and efficient oversight, consistent oversight of consumer financial protection, and so on and so forth. [ Jacques Arsenault: ] Now you mentioned how the system was sort of brought up piecemeal and there had been a number of efforts to change it or modernize it over the years and one of the most recent was the Dodd-Frank Act, which was passed in response to the last financial crisis. Do the changes ever made to financial regulation in that act, are they helping? [ Lawrance Evans: ] For sure, they did address some weaknesses and gaps in the regulatory system. For example, there was some consolidation, one regulator was abolished—its authorities were transferred to the remaining regulators. A new agency was created to streamline consumer financial protection, so there was some good that was done there. And one of the key reforms was the establishment of a oversight council that is comprised of the various heads of the federal financial regulators and its goal is to really monitor what we call systemic risk, or risk to the overall stability of the system. Prior to that council which is called FSOC, the Financial Stability Oversight Council, each regulator stayed in their own jurisdiction. So no one had a sense of risk building up in the entire system. But, for the most part, I would say Dodd-Frank left the regulatory structure unchanged. [ Jacques Arsenault: ] So then, what recommendations is GAO making in this report? [ Lawrance Evans: ] So we're asking Congress to consider whether changes to the regulatory structure are needed to better ensure consistent and effective oversight and this could include the consideration of collapsing the number of federal entities involved in oversight of the financial system. We're also asking Congress to consider whether legislative changes are necessary to ensure an effective response to the risk, to the stability of the financial system, and as usual we're asking for better collaboration and information-sharing amongst those involved in the broad-based monitoring of the financial system. [ Jacques Arsenault: ] And finally, for Americans, whether they are investing or just holding money in a bank or buying insurance, what would you say is the bottom line of this report? [ Lawrance Evans: ] So I'd point out that a fully functioning financial system is critical to economic growth and the well-being of all citizens and you can just think about the recent financial crisis where financial activity triggered the worst recession since the great depression. And many households suffered from falling asset prices, increased unemployment rates and all the ills associated with recession. So we think Americans deserve the most efficient, effective, and coherently designed system. A system like that would provide a nice check against those type of ills. But without congressional action it is unlikely that a system with all the characteristics you would want in an ideal regulatory system would be achieved. [ Background Music ] [Narrator:] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional watchdog, the U.S. Government Accountability Office.