Summary: GAO discussed its views on modernizing the U.S. financial system, focusing on issues related to: (1) expanding banking organizations' powers; and (2) commercial ownership of U.S. banks. GAO noted that: (1) while benefits may exist from allowing banking organizations to increase their activities, competitors and other forces in the market could impose risks that would exacerbate the industry's problems; (2) it could not determine the extent to which the banking industry could benefit from or be harmed by allowing banking organizations access to nontraditional lines of business or whether such actions could solve the banking industry and the Bank Insurance Fund's (BIF) financial difficulties; (3) if Congress decides to expand banks' powers, it should implement such reforms as strengthening bank regulation, supervision, and operations, rebuilding BIF, and updating and strengthening bank holding companies; (4) once all the reforms are in place, new powers could be phased in accompanied by appropriate safeguards to prevent risks and ensure competitive equity; and (5) allowing commercial firms to acquire banking organizations would be inappropriate, since little information exists regarding the extent to which new conglomerates may experience financial difficulty and create major bailouts.
