Financial Regulation: Industry Trends Continue to Challenge the  
Federal Regulatory Structure (12-OCT-07, GAO-08-32).		 
                                                                 
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.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-32						        
    ACCNO:   A77308						        
  TITLE:     Financial Regulation: Industry Trends Continue to	      
Challenge the Federal Regulatory Structure			 
     DATE:   10/12/2007 
  SUBJECT:   Bank management					 
	     Banking law					 
	     Banking regulation 				 
	     Federal regulations				 
	     Federal reserve banks				 
	     Financial institutions				 
	     Financial management				 
	     Internal controls					 
	     Regulatory agencies				 
	     Reporting requirements				 
	     Securities regulation				 

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GAO-08-32

   

     * [1]Results in Brief
     * [2]Background
     * [3]Measuring the Costs and Benefits of Regulation Has Been Diff

          * [4]Regulators and the Financial Services Industry Face Challeng
          * [5]Concerns Exist that Regulation Could Hinder Market Efficienc
          * [6]U.S. Regulators Have Reviewed Existing Regulations
          * [7]Forum Participants Shared Concerns Regarding Regulatory Burd
          * [8]We Have Recommended Improved Review of Regulations

     * [9]Developments in a Dynamic Financial Industry Environment Pos

          * [10]Aspects of the Current Regulatory Structure Have Contributed
          * [11]Key Trends Have Changed the Financial Services Industry
          * [12]Recent Legislative Changes Have Affected the Financial Servi
          * [13]Recent Industry Changes Demonstrate the Challenges Confronti

               * [14]Consolidated Supervision of Holding Companies
               * [15]ILC Holding Company Regulation
               * [16]Basel II Implementation
               * [17]OCC Preemption and Charter Choice
               * [18]SEC and CFTC Joint Jurisdiction over Certain Products

          * [19]Regulators Have Often Collaborated to Respond to Regulatory
          * [20]Accountability for Identifying and Responding to Risks that

     * [21]Options to Change the Federal Financial Regulatory Structure

          * [22]Modernizing the Financial Regulatory System Remains a Challe
          * [23]Some Lessons May Be Learned from the United Kingdom's FSA Mo
          * [24]Clear, Consistent Regulatory Goals Are Important Steps to Im
          * [25]Treasury Has Announced Plans to Consider Regulatory Structur

     * [26]Agency Comments and Our Evaluation
     * [27]Appendix I: Participants in the June 11, 2007, Comptroller G
     * [28]Appendix II: Comments from the Chairman of the Board of Gove
     * [29]Appendix III: Comments from the Chairman of the National Cre
     * [30]Appendix IV: GAO Contact and Staff Acknowledgments

          * [31]GAO Contact
          * [32]Staff Acknowledgments

     * [33]Related GAO Products

          * [34]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

October 2007

FINANCIAL REGULATION

Industry Trends Continue to Challenge the Federal Regulatory Structure

GAO-08-32

Contents

Letter 1

Results in Brief 3
Background 7
Measuring the Costs and Benefits of Regulation Has Been Difficult,
Complicating Efforts to Reduce Regulatory Burden 12
Developments in a Dynamic Financial Industry Environment Pose Challenges
to the Federal Financial Regulatory Structure 17
Options to Change the Federal Financial Regulatory Structure 37
Agency Comments and Our Evaluation 46
Appendix I Participants in the June 11, 2007, Comptroller General's Forum
47
Appendix II Comments from the Chairman of the Board of Governors of the
Federal Reserve System 49
Appendix III Comments from the Chairman of the National Credit Union
Administration 52
Appendix IV GAO Contact and Staff Acknowledgments 53
Related GAO Products 54

Figures

Figure 1: Federal Supervisors for a Hypothetical Financial Holding Company
11
Figure 2: Percent of Assets Held by Largest 25 Banks and Number of Active
Banking Institutions, 1996-2006 19
Figure 3: Changes in Assets by Bank Charter, 1996-2006 20
Figure 4: Selected Legislation Resulting in Financial Regulatory Changes
24

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

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separately.

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.^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.

^1The 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.

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.^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).^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,^4 this report

           o describes measurements of the costs and benefits of financial
           regulation in general and current efforts to avoid excessive
           regulatory burden;^5 
           o describes financial industry trends and the challenges that
           these pose to the federal financial regulatory structure; and
           o discusses various options to enhance the efficiency and
           effectiveness of the federal financial regulatory structure.

^2GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [35]GAO-05-325SP (Washington, D.C.: February 2005).

^3International 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).

^4Financial Services Regulatory Relief Act of 2006, Pub. L. No. 109-351, S
1002, 120 Stat. 1966, 2009-2010 (Oct. 13, 2006).

           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.
			  
^5By "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.

           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

           o commercial banks, which originally focused on the banking needs
           of businesses, but then over time broadened their services;
           o 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;
           o credit unions, which are member-owned cooperatives run by
           member-elected boards with a historic emphasis on serving people
           of modest means; and
           o 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.^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:

           o 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.
           o 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.
			  
^6For more information on ILCs, see GAO, Industrial Loan Corporations:
Recent Asset Growth and Commercial Interest Highlight Differences in
Regulatory Authority, [36]GAO-05-621 (Washington, D.C.: Sept. 15, 2005).
			 
           o 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.
           o 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.
           o 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.^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.^8
			  
^7Recently, 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.

^8For more information on securities and banking regulators, see GAO,
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.
Regulatory Structure, [37]GAO-05-61 (Washington D.C.: Oct. 6, 2004).

           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.^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.
			  
^9See [38]GAO-05-61 , 9.			  

Figure 1: Federal Supervisors for a Hypothetical Financial Holding Company

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.^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.^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.^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.^13

^10GAO, Reexamining Regulations: Opportunities Exist to Improve
Effectiveness and Transparency of Retrospective Reviews, [39]GAO-07-791
(Washington, D.C., Jul. 16, 2007).

^11Gregory 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, [40]GAO/GGD-94-28 (Washington, D.C.: Dec. 13, 1993).

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.^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.^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.^16 However, some argue that
regulatory competition helps bring about innovation in regulatory
approaches, as one Forum participant noted.

^12GAO, Risk-Based Capital: Bank Regulators Need to Improve Transparency
and Overcome Impediments to Finalizing the Proposed Basel II Framework,
[41]GAO-07-253 (Washington, D.C.: Feb. 2007).

^13Deloitte, The Cost of Regulation Study, A report commissioned by the
Financial Services Authority and the Financial Services Practitioner
Panel, (London, June 28, 2006).

^14U.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.

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.^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,^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.^19 Another outcome of the EGRPRA
process was the development of proposals that were incorporated into the
Financial Services Regulatory Relief Act of 2006.

^15U.S. Chamber of Commerce, Report and Recommendations of the Commission
on the Regulation of U.S. Capital Markets in the 21st Century, March 2007.

^16GAO, Financial Market Regulation: Benefits and Risks of Merging SEC and
CFTC, [42]GAO/T-GGD-95-153 (Washington, D.C.: May 3, 1995).

^17As of October 5, 2007, this report had not been released.

^18Call reports provide financial and structural information, such as
ownership, for FDIC-insured depository institutions.

^1972 Fed. Reg. 36550 (July 3, 2007).

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.^20 The
participant added that regulators should consider whether the BSA is
providing the intended results and outcomes, considering the costs.^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)^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.

^20We currently have ongoing work in this area to review the resources
required for banks to file such reports.

^21Agencies 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, [43]GAO-07-791 (Washington, D.C.: July 2007).

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.^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.^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.

^22The 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.

^23Section 3 of the Regulatory Flexibility Act of 1980 (Pub. L. No.
96-354, 94 Stat. 1164, 1169 (1980) (codified at 5 U.S.C. S 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 [44]GAO-07-791 .

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.^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.^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:^27

           o consolidation: fewer firms comprise the industry than in the
           past;
           o conglomeration: firms have merged or acquired one another,
           creating fewer, often larger firms in terms of asset size;
           o convergence: banking, securities, and futures firms offer
           similar products; and
           o globalization: firms have expanded throughout the country and
           the world.
			  
^25Charter 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, [45]GAO-06-387
(Washington, D.C.: Apr. 28, 2006), 25-28.

^26 [46]GAO-05-61 , 114.

^27These trends are discussed in greater detail in [47]GAO-05-61 , ch. 2.

           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

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.^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

^28The 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.

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.^29 The securities
industry has long been concentrated, with the assets of the largest 10
firms exceeding 50 percent since at least 1996.^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.^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.^32

^29Assets, 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 [48]GAO-05-61 , 46-47.

^31Gianni 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 [49]GAO-05-61 .

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.^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.^34 Similarly, Citigroup
reported that about 44 percent of its income came from regions other than
the United States.^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.^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.

^33IKB Deutsche Industriebank, PNB Paribas, and other foreign banks
experienced losses due to defaults on subprime mortgages in the United
States, according to news reports.

^34According 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.

^35Citigroup, Form 10-K for 2006, filed with SEC; p. 5.

^36GAO, Credit Derivatives: Confirmation Backlogs Increased Dealers'
Operational Risks, but Were Successfully Addressed after Joint Regulatory
Action, [50]GAO-07-716 (Washington, D.C.: June 13, 2007).

Figure 4: Selected Legislation Resulting in Financial Regulatory Changes

^aPub. L. No. 91-508, Titles I, II, 84 Stat. 1114, 1118 (1970).

^bPub. L. No. 106-102, 113 Stat. 1338 (1999).

^cPub. L. No. 109-351, 120 Stat. 1966 (2006).

^dPub. L. No. 94-200, Title III, 89 Stat. 1124, 1125 (1975).

^ePub. L. No. 107-204, 116 Stat. 745 (2002).

^fPub. L. No. 96-221, 94 Stat. 132 (1980).

^gPub. L. No. 97-320, 96 Stat. 1469 (1982).

^hPub. L. No. 103-328, 108 Stat. 2338 (1994).

^iPub. L. No. 107-56, Title III, 15 Stat. 272, 296 (2001).

^jPub. L. No. 109-171, Title II, 120 Stat. 4, 9 (2005).

^kPub. L. No. 101-73, 103 Stat. 183 (1989).

^lPub. L. No. 104-290, 110 Stat. 3416 (1996).

^mPub. L. No. 102-242, 105 Stat. 2236 (1991).

^nPub. L. No. 104-208, Title II, Div. A, 110 Stat. 3009-394 (1996).

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^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.^38

^37For 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.

^38GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
[51]GAO-07-154 (Washington, D.C.: Mar. 15, 2007).

^39 [52]GAO-07-154 , 39, 48-51.

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.^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).^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.^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.^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.^43

^40GAO, Financial Market Regulation: Agencies Engaged in Consolidated
Supervision Can Strengthen Performance Measurement and Collaboration,
[53]GAO-07-154 (Washington, D.C.: March 15, 2007).

^41See [54]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.

  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.^44

^42GAO 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.

^4372 Fed. Reg. 5290 (Feb. 5, 2007).

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.^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.

^44In 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 [55]GAO-07-253 , 32
ff.

^45See [56]GAO-07-253 , 77-79.

  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.^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.^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.^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.

^46GAO, OCC Preemption Rules: OCC Should Further Clarify the Applicability
of State Consumer Protection Laws to National Banks, [57]GAO-06-387
(Washington, D.C.: Apr. 28, 2006).

^47Watters v. Wachovia, N.A., 127 S. Ct. 1559 (Apr. 17, 2007).

^48For example, since their introduction in the early 1990s, credit
derivatives surpassed a notional amount of $34 trillion at year-end 2006.
See [58]GAO-07-716 .

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.^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.^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.^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.^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.^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.

^49See, for example, GAO, CFTC/SEC Enforcement Programs: Status and
Potential Impact of a Merger, [59]GAO/T-GGD-96-36 (Washington, D.C.: Oct.
25, 1995).

^50GAO, CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional
Accord, [60]GAO/GGD-00-89 (Washington, D.C.: Apr. 6, 2000).

^51 [61]GAO-07-716 .

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.^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."^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.^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.)

^52GAO, Bank Secrecy Act: Opportunities Exist for FinCEN and the Banking
Regulators to Further Strengthen the Framework for Consistent BSA
Oversight, [62]GAO-06-386 (Washington, D.C.: Apr. 28, 2006).

^53See [63]GAO-05-61 , 97-98.

^54See GAO, Financial Regulatory Coordination: The Role and Functioning of
the President's Working Group, [64]GAO/GGD-00-46 (Washington, D.C.: Jan.
2000).

^55 [65]GAO/GGD-04-46 , 3.

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:

^56 [66]GAO-07-154 .

           o 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.^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.
           o 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.^58 
           o 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.^59 
           o 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.^60

^57 [86]GAO/GGD-00-46 .

^58GAO, Long-Term Capital Management: Regulators Need to Focus Greater
Attention on Systemic Risk, [87]GAO/GGD-00-3 , (Washington, D.C.: Oct. 29,
1999).

^59GAO, Potential Terrorist Attacks: Additional Actions Needed to Better
Prepare Critical Financial Market Participants, [88]GAO-03-251
(Washington, D.C.: Feb. 12, 2003).

           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.^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.^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.

^60GAO, Better Information Sharing among Financial Services Regulators
Could Improve Protections for Consumers, [89]GAO-04-882R (Washington,
D.C.: June 29, 2004).

^61We have noted limitations on effectively planning strategies that cut
across regulatory agencies. See [90]GAO-05-61 .

^62 [91]GAO-05-61 .

           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

           o consolidating the regulatory structure within the "functional"
           areas;
           o moving to a regulatory structure based on regulation by
           objective (a "twin peaks" model);
           o combining all financial regulators into a single entity; or
           o 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.^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.^64

           Others also have proposed changes to modernize the financial
           regulatory system, including the following:

           o 1994 Treasury proposal.^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.
           o H.R. 1227 (1993).^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.^67 
           o 1994 LaWare proposal.^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.
           o 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.
           o 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.

^63 [92]GAO-05-61 .

^64 [93]GAO-05-61 .

^65This 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).

^66The Bank Regulatory Consolidation and Reform Act of 1993, H.R. 1227,
103rd Cong. (1993).

^67CRS, Bank Regulatory Agency Consolidation Proposals: A Structural
Analysis (Washington, D.C., Mar. 18, 1994).

^68This 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).
           
           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.^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^70 and
           other international deliberations.^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.
			  
^69While 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 [94]GAO-05-61 , 67.

^70The 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. [95]GAO-05-61 , 62.

^71In 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.			  

           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:^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."^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.
								
^72GAO, Bank Oversight: Fundamental Principles for Modernizing the U.S.
Structure, [96]GAO/T-GGD-96-117 (Washington, D.C.: May 2, 1996).

^73Basel Committee on Banking Supervision, Core Principles for Effective
Bank Supervision. (Basel, Switzerland, October 2006), 5.

           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.^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.^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.^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.^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.
			  
^74See, [97]GAO-07-791 .

^75GAO, OCC Preemption Rulemaking: Opportunities Existed to Enhance the
Consultative Efforts and Better Document the Rulemaking Process,
[98]GAO-06-8 (Washington, D.C.: Oct. 17, 2005).

^76See [99]GAO-05-61 .

^77The 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.

           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.^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.^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.
			  
^78IMF 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.

^79Department of the Treasury,  Paulson Announces Next Steps to Bolster
U.S. Markets' Global Competitiveness. (Washington, D.C.,  June 27, 2007.)

           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 [67]http://www.gao.gov .

           If you or your staffs have any questions about this report, please
           contact me at (202) 512-8678 or [68][email protected] . 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.

           Yvonne Jones
			  Director, Financial Markets and Community Investment
			  
			  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] 

Footnotes: 

[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).



           Appendix IV: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact			  

           Yvonne Jones (202) 512-8678 or [69][email protected]
			  
			  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.
			  
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Highlights of [101]GAO-08-32 , a report to congressional committees

October 2007

FINANCIAL REGULATION

Industry Trends Continue to Challenge the Federal Regulatory Structure

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.

[102]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.

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.

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  76. http://www.gao.gov/cgi-bin/getrpt?GAO-04-91
  77. http://www.gao.gov/cgi-bin/getrpt?GAO-02-362
  78. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-16
  79. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-97-23
  80. http://www.gao.gov/
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  82. http://www.gao.gov/fraudnet/fraudnet.htm
  83. mailto:[email protected]
  84. mailto:[email protected]
  85. mailto:[email protected]
  86. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-46
  87. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-3
  88. http://www.gao.gov/cgi-bin/getrpt?GAO-03-251
  89. http://www.gao.gov/cgi-bin/getrpt?GAO-04-882R
  90. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  91. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  92. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  93. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  94. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  95. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
  96. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-96-117
  97. http://www.gao.gov/cgi-bin/getrpt?GAO-07-791
  98. http://www.gao.gov/cgi-bin/getrpt?GAO-06-8
  99. http://www.gao.gov/cgi-bin/getrpt?GAO-05-61
 100. http://www.gao.gov/cgi-bin/getrpt?GAO-08-32
 101. http://www.gao.gov/cgi-bin/getrpt?GAO-08-32
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