Walter W. Eubanks
Specialist in Financial Economics
To address the causes of the 2007-2009 financial crisis, three major proposals have been put forward that would consolidate at least some parts of the federal financial regulatory structure: the 2008 Department of the Treasury Blueprint for a Modernized Regulatory Structure (the Henry Paulson Plan), the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), and the Restoring American Financial Stability Act of 2010 (RAFSA) introduced by Senator Christopher Dodd, chairman of the Senate Committee on Banking, Housing, and Urban Affairs. Even though these three proposals would not establish a single federal financial services regulator along the lines of Japan's Financial Services Agency (FSA) or the United Kingdom's Financial Services Authority (FSA), the three proposals are the federal government's attempts to remedy the causes of the financial crisis by simplifying and adding transparency to financial services regulation.
Before the financial crisis, there were a number of proposals to consolidate the federal financial services regulatory structure. However, Congress has not reduced the number of federal financial services regulatory agencies for several reasons. First, the U.S. financial regulatory system has evolved into what some call a functional competitive regulatory structure where regulatory agencies compete against each other and there are regulatory redundancies. Yet, this structure may be viewed as fundamentally sound, despite periodic failures in regulatory enforcement.
Second, the regulation of financial services has become more complex. Since the Civil War, both the federal government and the states have regulated most financial services providers, such that they have some overlapping regulatory relationships. Financial providers began commingling financial services in the 1980s, a practice that contributed to regulatory enforcement failures. For example, banks no longer were exclusively providing banking services. Instead, insurance and securities companies also delivered banking services. When the federal government enacted the 1999 Gramm-Leach-Bliley Act (GLBA, P.L. 106-102), which repealed the law prohibiting the mixing of banking and commerce and allowed the commingling of financial services, the enforcement of financial regulation became more complicated. Analysts argued that regulators' inability to enforce safety and soundness requirements contributed to the financial crisis.
This report provides a brief history and overview of the U.S. federal financial services regulatory structure and examines the regulatory structural changes the three major federal government proposals would make to remedy the causes of the financial crisis. Specifically:
• The 2008 Paulson plan would have reduced the number of regulatory agencies to three by eliminating financial institutions' charters. Most depository institutions would have a national charter.
• The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which would add a Financial Services Oversight Council, an independent Consumer Financial Protection Agency, and a Federal Insurance Office instead of consolidating agencies.
• The Restoring American Financial Stability Act of 2010 (RAFSA), which would consolidate and redistribute the regulatory responsibilities of bank holding companies by asset size among the three remaining bank regulators.
The report concludes with a discussion of some possible implications of reform.
Date of Report: April 12, 2010
Number of Pages: 26
Order Number: R41176
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Saturday, April 17, 2010
Federal Financial Services Regulatory Consolidation: Structural Response to the2007-2009 Financial Crisis
Walter W. Eubanks