Financial Regulation:

Bank Modernization Legislation

T-OCE/GGD-97-103: Published: May 7, 1997. Publicly Released: May 7, 1997.

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GAO discussed the modernization of the U.S. financial services regulatory system.

GAO noted that: (1) the laws governing the financial services industry and the regulatory structure that oversees it were developed for an industry compartmentalized into commercial banking, investment banking, and insurance; (2) in recent decades, however, these activities have converged to where many financial products and services offered by banks, securities firms, and insurance companies are more alike than different; (3) attempts by financial regulators to adapt to the rapid changes taking place in the financial marketplace have been incremental and ad hoc, resulting in overlaps, anomalies and even some gaps; (4) thus, Congress could improve the functioning of the U.S. regulatory system by modernizing the banking laws; (5) however, modernization should not ignore other goals, such as maintaining the safety and soundness of the financial system and the deposit insurance funds, preventing undue concentrations of economic power, and protecting consumers from conflicts of interest; (6) GAO suggests that specific safeguards be included in any modernization legislation; (7) financial services holding companies should be regulated on a consolidated, comprehensive basis, with appropriate firewall provisions to protect both consumers and taxpayers against potential conflicts of interest and to prevent the spread of the federal safety net provided to banks and any associated subsidy to nonbanking activities; (8) capital standards for both insured banks and financial services holding companies should exist that adequately reflect all major risks, including market and operations risk as well as credit risk; (9) clear rulemaking and supervisory authority should be established that results in a consistent set of rules that are consistently applied for similar financial activities and minimizes regulatory burden; (10) furthermore, while the case for modernizing banking laws is clear, GAO would urge that Congress proceed cautiously if it decides to relax the current separation of banking and commerce; (11) GAO found that the potential benefits of mixing banking and commerce generally lacked empirical support or could be realized without removing the current restrictions; and (12) GAO's work also indicated that eliminating the current separation could pose a variety of risks to the safety and soundness of the financial system, the deposit insurance funds, and to consumers and taxpayers.

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