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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2007:
Financial Regulation:
Industry Trends Continue to Challenge the Federal Regulatory Structure:
Financial Regulation:
GAO-08-32:
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 jonesy@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
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
Forum:
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
Administration:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Figures:
Figure 1: Federal Supervisors for a Hypothetical Financial Holding
Company:
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
Changes:
Abbreviations:
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:
Chairman:
The Honorable Richard Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs: United States Senate:
The Honorable Barney Frank:
Chairman:
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-
effective.
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.
Background:
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
banks;
* 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
illustrates.
Figure 1: Federal Supervisors for a Hypothetical Financial Holding
Company:
[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
markets.
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
reexamined.
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
world.
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
Industry:
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
problems.
Figure 4: Selected Legislation Resulting in Financial Regulatory
Changes:
[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
system.
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
others.
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
Directors.
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
structure.
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
72]
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
Modernization:
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, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678 or jonesy@gao.gov. 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
Forum:
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:
Chairman:
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.
Sincerely,
Signed by:
cc: James M. McDermott, GAO:
[End of section]
Appendix III: Comments from the Chairman of the National Credit Union
Administration:
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.
Sincerely,
Signed by:
JoAnn Johnson:
Chairman:
1775 Duke Street:
Alexandria, VA:
22314-3428:
703-518-6300:
703-518-6319-Fax:
[End of section]
Appendix IV GAO Contact and Staff Acknowledgments:
GAO Contact:
Yvonne Jones (202) 512-8678 or jonesy@gao.gov:
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,
2002.
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.
Footnotes:
[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
findings.
[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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