Summary: Proposals before Congress to modernize the financial services regulatory system provide a range of options for restructuring the traditional relationships between banking, securities, and related activities. Enhancing financial sector efficiency is an important policy goal, but other important goals must also be considered, such as maintaining the safety and soundness of the financial system and the deposit insurance funds, preventing undue concentrations of economic power, and protecting consumers from potential conflicts of interest. GAO believes that modernization of the financial services regulatory system should (1) provide consolidated and comprehensive supervision of all companies owning federally insured depository institutions--with coordinated functional regulation of individual components, (2) ensure that capital levels adequately reflect the amount of risk-taking, and (3) ensure that regulatory resources and capabilities keep pace with expanding bank powers and increased links between banking and other activities. Moving away from a financial services holding company approach or allowing commercial or industrial firms to own banks raises questions and concerns that suggest that Congress should proceed with caution.
