RESTRUCTURING U.S. FEDERAL FINANCIAL REGULATION

1. INTRODUCTION The debate over U.S. federal bank regulatory structure goes back for nearly a century. Although studies, commissions and committees of banking scholars, and high-level government officials and industry practitioners have been common, change has come only sporadically. (1) For the most part, the U.S. financial regulatory system remains a highly decentralized system that has muddled along more or less in its present form since the New Deal reforms of the 1930s. Most observers of the U.S. financial regulatory system would agree that if it did not already exist, no one would invent it. (2) The overlap in tasks among federal regulators and between federal and state regulators, particularly for banks, creates a confusing system that no one building a system anew would want to duplicate. That said, most observers would also admit that for all its faults, the system seems to have served both the industry and the industry's customers well--assuring a safe and sound financial system--though the inefficiencies inherent in such a patchwork system undoubtedly impose costs. For the most part, entities within the financial services industry have learned how to operate and even thrive under the regulatory system that has developed. U.S. consumers enjoy an immense array of financial products and services, and the capital markets provide funding for businesses large and small. Although change to the U.S. system of federal regulation is not imminent, financial modernization and changes to the regulatory structures of financial systems in other countries provide a rationale for reviewing the structure and organization of the U.S. federal financial regulatory system and asking whether it could function more efficiently and effectively. Past studies have generally confined themselves to reviewing the bank regulatory system, although many have included the regulation of thrifts and credit unions. At least part of the reason for this focus is that until recently, dividing financial services regulation along industry lines was relatively easy to do--banks, thrifts, insurance companies, and securities firms produced different products and services. As the financial services industry has evolved, however, it has become more complex. Products and services once provided by distinct market segments have become increasingly similar (a process referred to as product and service convergence). This convergence has accelerated with securitization, the development of derivatives markets, and with changes in laws to promote financial modernization. In a number of countries outside the United States, product and service convergence has prompted an overhaul of the regulatory system--in many cases, combining once separate regulators into a single regulatory structure. This article provides an overview of the U.S. financial regulatory system. It investigates the arguments for and against reform and discusses how the changing financial marketplace gives impetus to regulatory reform. It then examines the evolution of the U.S. approach to regulation and compares the U.S. approach to regulation and compares the U.S. approach to that which other countries are now adopting. The article discusses the role of the central bank and reexamines the need for reform of the regulatory structure. II. THE U.S. FINANCIAL REGULATORY SYSTEM The current system for regulating and supervising financial institutions is complex. (3) At the federal level, commercial banks and their holding companies are regulated and supervised by the Office of the Comptroller of the Currency (OCC), the Federal Reserve System (Federal Reserve), and the Federal Deposit Insurance Corporation (FDIC). Thrifts are regulated and supervised by theOffice of Thrift Supervision (OTS) and credit unions by the National Credit Union Administration. The federal regulatory system also includes regulation of the securities industry by the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission, (4) regulation of Fannie Mae and Freddie Mac by the Office of Federal Housing Enterprise Oversight, regulation of the Federal Home Loan Banks by the Federal Housing Finance Board, regulation of the farm credit system by the Farm Credit Administration, and regulation of pension funds by the Employee Benefits Security Administration in the Department of Labor and by the Pension Benefit Guaranty Corporation. …