Summary: Recent years have witnessed dynamic changes in the financial services industry. Through growth, mergers, and acquisitions, coupled with regulatory reevaluation of acceptable activities, financial institutions in different financial sectors are increasingly competing directly for the same business by offering similar products and undertaking similar activities. Advances in financial theory and technology have enabled firms to understand, measure, and manage the financial risks they face in their business activities far more effectively than in the past. As companies have improved their internal measurement of risk, regulators have responded by reexamining their capital regulations that require firms to hold minimum levels of capital as a buffer against unexpected losses. Some regulators have already developed capital standards that attempt to better correlate required regulatory capital with the actual risks that firms face in their activities, while other regulators are considering similar changes. This report is intended to inform Congress and others of both regulatory capital requirements and financial firms' approaches to risk measurement. GAO describes, for the banking, securities, futures, and life insurance sectors, (1) regulatory views on the purpose of capital and current regulatory requirements, (2) the approaches of some large financial firms to risk measurement and capital allocation, and (3) issues in capital regulation and initiatives being considered for changes to regulatory capital requirements.
