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Federal Financial Services Regulatory Consolidation: An Overview

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Among the arguments offered for consolidating the federal regulatory structure of the financial services industry is that the industry has changed in ways that blur the clear-cut boundaries between the functional areas of banking, insurance, securities, and commodities markets. It has also been argued that while the financial services firms are primarily responsible for effectively managing their risks, the new nature of those risks has created a need for the government to take a more comprehensive approach to financial regulation. Moreover, a consolidated financial services regulator at the national level is more suited to accommodate international regulatory negotiations on financial services regulations such as capital, accounting, and privacy standards.

Over the years, a number of proposals to consolidate the federal regulatory structure of the financial services industry have been put forth. The United States, however, has yet to make any significant move to do so. A key reason is that the functional, competitive regulatory structure of the United States was, and continues to be, viewed by most policymakers and knowledgeable observers as being sound over time, despite a number of crises. The U.S. regulatory structure reflects historical evolution rather than deliberate design. The structure evolves as regulators address regulatory deficiencies on whatever level they may occur. For example, significant federal regulation of banks first occurred during the Civil War when states' management of their currencies failed dramatically. In another example, financial regulators addressed the savings and loan associations failures of the 1980s with riskbased capital requirements for all insured-depository institutions for the first time. And more recently, the Sarbanes-Oxley Act established accounting standards for publicly traded companies in response to the accounting frauds leading to the bankruptcy of several large publicly traded firms. The structure has often been able to successfully address such problems quickly before they disrupt the economy.

To improve their ability to regulate the modern financial services sectors, many countries including the United Kingdom, Japan, and Germany have recently consolidated their financial services regulatory agencies. Financial Services Authority of the United Kingdom (FSA-UK), the Financial Services Agency of Japan (FSA- Japan), and the Federal Financial Supervisory Authority (BaFin) in Germany provide a point of comparison for the U.S. regulatory structure. These foreign regulatory structures are said to offer more effective methods of regulating modern financial services firms. Yet in Japan and the United Kingdom these redesigned structures have not prevented the institutions they supervise from developing serious financial difficulties.

This report is a brief overview of the U.S. federal financial services regulatory structure. It briefly provides an historical analysis of the current U.S. functional and competitive regulatory structure. It assesses the difficulties in regulating institutions when the institutions are providing services outside the demarcated lines of business. It discusses some of the recent proposals to consolidate the U.S. regulatory agencies, and it assesses three consolidated financial services regulatory structures abroad. This report will be updated as developments warrant.


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