The mission of the Department of the Treasury ("Treasury") focuses on promoting
economic growth and stability in the United States. Critical to this mission is a sound
and competitive financial services industry grounded in robust consumer protection and
stable and innovative markets.
Financial institutions play an essential role in the U.S. economy by providing a means for
consumers and businesses to save for the future, to protect and hedge against risks, and to
access funding for consumption or organize capital for new investment opportunities. A
number of different types of financial institutions provide financial services in the United
States: commercial banks and other insured depository institutions, insurers, companies
engaged in securities and futures transactions, finance companies, and specialized
companies established by the government. Together, these institutions and the markets in
which they act underpin economic activity through the intermediation of funds between
providers and users of capital.
This intermediation function is accomplished in a number of ways. For example, insured
depository institutions provide a vehicle to allocate the savings of individuals. Similarly,
securities companies facilitate the transfer of capital among all types of investors and
investment opportunities. Insurers assist in the financial intermediation process by
providing a means for individuals, companies, and other financial institutions to protect
assets from various types of losses. Overall, financial institutions serve a vitally
important function in the U.S. economy by allowing capital to seek out its most
productive uses in an efficient matter. Given the economic significance of the U.S.
financial services sector, Treasury considers the structure of its regulation worthy of
examination and reexamination.
Treasury began this current study of regulatory structure after convening a conference on
capital markets competitiveness in March 2007. Conference participants, including
current and former policymakers and industry leaders, noted that while functioning well,
the U.S. regulatory structure is not optimal for promoting a competitive financial services
sector leading the world and supporting continued economic innovation at home and
abroad. Following this conference, Treasury launched a major effort to collect views on
how to improve the financial services regulatory structure.
In this report, Treasury presents a series of "short-term" and "intermediate-term"
recommendations that could immediately improve and reform the U.S. regulatory
structure. The short-term recommendations focus on taking action now to improve
regulatory coordination and oversight in the wake of recent events in the credit and
mortgage markets. The intermediate recommendations focus on eliminating some of the
duplication of the U.S. regulatory system, but more importantly try to modernize the
regulatory structure applicable to certain sectors in the financial services industry
(banking, insurance, securities, and futures) within the current framework.
Treasury also presents a conceptual model for an optimal regulatory framework. This
structure, an objectives-based regulatory approach, with a distinct regulator focused on
one of three objectives—market stability regulation, safety and soundness regulation
associated with government guarantees, and business conduct regulation—can better
react to the pace of market developments and encourage innovation and
entrepreneurialism within a context of enhanced regulation. This model is intended to
begin a discussion about rethinking the current regulatory structure and its goals. It is not
intended to be viewed as altering regulatory authorities within the current regulatory
framework. Treasury views the presentation of a tangible model for an optimal structure
as essential to its mission to promote economic growth and stability and fully recognizes
that this is a first step on a long path to reforming financial services regulation.
The current regulatory framework for financial institutions is based on a structure that
developed many years ago. The regulatory basis for depository institutions evolved
gradually in response to a series of financial crises and other important social, economic,
and political events: Congress established the national bank charter in 1863 during the
Civil War, the Federal Reserve System in 1913 in response to various episodes of
financial instability, and the federal deposit insurance system and specialized insured
depository charters (e.g., thrifts and credit unions) during the Great Depression. Changes
were made to the regulatory system for insured depository institutions in the intervening
years in response to other financial crises (e.g., the thrift crises of the 1980s) or as
enhancements (e.g., the Gramm-Leach-Bliley Act of 1999 ("GLB Act")); but, for the
most part the underlying structure resembles what existed in the 1930s. Similarly, the
bifurcation between securities and futures regulation, was largely established over
seventy years ago when the two industries were clearly distinct.
In addition to the federal role for financial institution regulation, the tradition of
federalism preserved a role for state authorities in certain markets. This is especially true
in the insurance market, which states have regulated with limited federal involvement for
over 135 years. However, state authority over depository institutions and securities
companies has diminished over the years. In some cases there is a cooperative
arrangement between federal and state officials, while in other cases tensions remain as to
the level of state authority. In contrast, futures are regulated solely at the federal level.
Historically, the regulatory structure for financial institutions has served the United States
well. Financial markets in the United States have developed into world class centers of
capital and have led financial innovation. Due to its sheer dominance in the global
capital markets, the U.S. financial services industry for decades has been able to manage
the inefficiencies in its regulatory structure and still maintain its leadership position.
Now, however, maturing foreign financial markets and their ability to provide alternate
sources of capital and financial innovation in a more efficient and modern regulatory
system are pressuring the U.S. financial services industry and its regulatory structure.
The United States can no longer rely on the strength of its historical position to retain its
preeminence in the global markets. Treasury believes it must ensure that the U.S.
regulatory structure does not inhibit the continued growth and stability of the U.S.
financial services industry and the economy as a whole. Accordingly, Treasury has
undertaken an analysis to improve this regulatory structure.
Over the past forty years, a number of Administrations have presented important
recommendations for financial services regulatory reforms.1 Most previous studies have
focused almost exclusively on the regulation of depository institutions as opposed to a
broader scope of financial institutions. These studies served important functions, helping
shape the legislative landscape in the wake of their release. For example, two reports,
Blueprint for Reform: The Report of the Task Group on Regulation of Financial Services
(1984) and Modernizing the Financial System: Recommendations for Safer, More
Competitive Banks (1991), laid the foundation for many of the changes adopted in the
In addition to these prior studies, similar efforts abroad inform this Treasury report. For
example, more than a decade ago, the United Kingdom conducted an analysis of its
financial services regulatory structure, and as a result made fundamental changes creating
a tri-partite system composed of the central bank (i.e., Bank of England), the finance
ministry (i.e., H.M. Treasury), and the national financial regulatory agency for all
financial services (i.e., Financial Services Authority). Each institution has well-defined,
complementary roles, and many have judged this structure as having enhanced the
competitiveness of the U.K. economy.
Australia and the Netherlands adopted another regulatory approach, the "Twin Peaks"
model, emphasizing regulation by objective: One financial regulatory agency is
responsible for prudential regulation of relevant financial institutions, and a separate and
distinct regulatory agency is responsible for business conduct and consumer protection
issues. These international efforts reinforce the importance of revisiting the U.S.