Summary: Laws governing the financial services industry were devised for an industry compartmentalized into commercial banking, investment banking, and insurance. The lines between these sectors have become increasingly blurred, however, and the financial products and services offered by banks, securities firms, and insurance companies today are more alike than different. Attempts by regulators to adapt to the rapid changes taking place in the financial marketplace have been incremental and ad hoc. Congress could improve the functioning of the U.S. regulatory system by modernizing the banking laws. Modernization, however, must also take into account other important goals, such as preserving the safety and the soundness of the financial system and the deposit insurance funds, preventing undue concentrations of economic power, and protecting consumers from conflicts of interest. This testimony recommends that several safeguards be included in any modernization legislation. GAO also urges Congress to proceed with caution if its decides to relax the current separation of banking and commerce.
