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GAO Financial Regulation_ a Frameowrk for Crafting and Assessing Porposals to Modernize

GAO Financial Regulation_ a Frameowrk for Crafting and Assessing Porposals to Modernize

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GAO testimony on Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System by Gene L. Dodaro, Acting Comptroller General of the U.S, January 21, 2009
GAO testimony on Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System by Gene L. Dodaro, Acting Comptroller General of the U.S, January 21, 2009

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Published by: Anne on Jan 26, 2009
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06/16/2009

 
 
GAO
United States Government Accountability Office
TestimonyBefore the Committee on HomelandSecurity and Governmental Affairs, U.S.Senate
FINANCIAL REGULATION A Framework for Craftingand Assessing Proposals toModernize the OutdatedU.S. Financial RegulatorySystem
Statement of Gene L. Dodaro Acting Comptroller General of the United States
For Release on DeliveryExpected at
2:00
 
 p
.m. ESTWednesday, January 21, 2009
GAO-09-314T
 
 
Mr. Chairman and Members of the Committee:I am pleased to be here today to discuss our January 8, 2009, report that provides a framework for modernizing the outdated U.S. financialregulatory system.
1
We prepared this work under the authority of theComptroller General to help policymakers weigh various regulatoryreform proposals and consider ways in which the current regulatorysystem could be made more effective and efficient. My statement today isbased on our report, which (1) describes how regulation has evolved inbanking, securities, thrifts, credit unions, futures, insurance, secondarymortgage markets and other important areas; (2) describes several keychanges in financial markets and products in recent decades that havehighlighted significant limitations and gaps in the existing regulatorysystem; and (3) presents an evaluation framework that can be used byCongress and others to shape potential regulatory reform efforts. To dothis work, we synthesized existing GAO work and other studies and metwith representatives of financial regulatory agencies, industryassociations, consumer advocacy organizations, and others. The workupon which the report is based was conducted in accordance withgenerally accepted government auditing standards. Those standardsrequire that we plan and perform the audit to obtain sufficient, appropriateevidence to provide a reasonable basis for our findings and conclusionsbased on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on ouraudit objectives. This work was conducted between April 2008 andDecember 2008.The report was enhanced by input from representatives of 29 agencies andother organizations, including federal and state financial regulatoryagencies, consumer advocacy groups, and financial service industry tradeassociations, who reviewed and commented on a draft of the report priorto its release. A list of organizations that reviewed the draft report isincluded at the end of my statement. In general, reviewers commented thatthe report represented an important and thorough review of the issuesrelated to regulatory reform.
1
GAO,
 Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System
,GAO-09-216(Washington,D.C.: Jan. 8, 2009).
Page 1 GAO-09-314T
 
 
The current U.S. financial regulatory system has relied on a fragmentedand complex arrangement of federal and state regulators—put into placeover the past 150 years—that has not kept pace with major developmentsin financial markets and products in recent decades. Today, almost adozen federal regulatory agencies, numerous self-regulatory organizations,and hundreds of state financial regulatory agencies share responsibility foroverseeing the financial services industry. As the nation finds itself in themidst of one of the worst financial crises ever, it has become apparent thatthe regulatory system is ill-suited to meet the nation’s needs in the 21stcentury.
Summary
Several key changes in financial markets and products in recent decadeshave highlighted significant limitations and gaps in the existing regulatorysystem.
 
First, regulators have struggled, and often failed, to mitigate thesystemic risks posed by large and interconnected financialconglomerates and to ensure they adequately manage their risks.
 
Second, regulators have had to address problems in financial marketsresulting from the activities of large and sometimes less-regulatedmarket participants—such as nonbank mortgage lenders, hedge funds,and credit rating agencies—some of which play significant roles intoday’s financial markets.
 
Third, the increasing prevalence of new and more complex investment products has challenged regulators and investors, and consumers havefaced difficulty understanding new and increasingly complex retailmortgage and credit products.
 
Fourth, standard setters for accounting and financial regulators havefaced growing challenges in ensuring that accounting and auditstandards appropriately respond to financial market developments, andin addressing challenges arising from the global convergence of accounting and auditing standards.
 
Finally, as financial markets have become increasingly global, thecurrent fragmented U.S. regulatory structure has complicated someefforts to coordinate internationally with other regulators.These significant developments have outpaced a fragmented and outdatedregulatory structure, and, as a result, significant reforms to the U.S.regulatory system are critically and urgently needed. The current systemhas significant weaknesses that, if not addressed, will continue to expose
Page 2 GAO-09-314T

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