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Lawmakers fired the first shots Monday in what could emerge as the latest attempt to radically change how the United States supervises its banks, insurance companies and securities firms. Responding to a request of Senate Banking Committee Chairman Richard Shelby, R-Ala., the Government Accountability Office has concluded that the current regulatory structure may be insufficient for a financial system that since passage of the Gramm-Leach-Bliley Act has become more concentrated and more international. GAO does not recommend specific changes. But it identifies three options: consolidate oversight by function, empower one agency to oversee all aspects of active international financial firms or consolidate all banking, insurance and securities regulation into a single entity. “The strength and vitality of the U.S. financial services industry demonstrates that the regulatory structure has not failed,” GAO says. “But some have questioned whether a fragmented regulatory system is appropriate in today’s environment.” All three options are likely to encounter stiff opposition. Consolidating oversight by function would mean combining all of the banking agencies into a single entity rather than having it divided among the four federal agencies and the 50 state regulators. It also means creating a federal insurance regulator, taking this power from the states. Those objections would be multiplied ten-fold if Congress tried to copy systems adopted in Japan and the United Kingdom which consolidate all financial oversight into a single agency. Even creating a single regulator for the very large, internationally active financial institution is likely to start a turf war. The prime regulators for these institutions now either are the Federal Reserve Board, the Securities and Exchange Commission, the New York state banking department or the Office of Thrift Supervision. Gilbert T. Schwartz, a partner at Schwartz & Ballen in Washington, said only a major financial crisis in the banking, insurance and securities sectors could result in such radical reforms. “Absent that kind of shock to the system, I can’t imagine any changes,” Schwartz said. Efforts to reform U.S. financial oversight have failed repeatedly for decades, he said. “When I came to Washington in 1974, they already had been trying for 10 years and that was just for the banking agencies,” he said. “Imagine the difficulty of adding securities and insurance.” One Washington-based banking lawyer said none of the internationally active financial institutions want to give up their regulator. That makes reform extremely unlikely, the lawyer said. “It will be easier to get the Bush administration rewrite of the tax code than to get this done,” the lawyer quipped. “It won’t happen until the people who are regulated want it to happen.” Copyright �2004 TDD, LLC. All rights reserved.

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