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. ...

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THE DEPARTMENT OF THE TREASURY
Henry M. Paulson, Jr., Secretary
Robert K. Steel, Under Secretary for Domestic Finance
David G. Nason, Assistant Secretary for Financial Institutions

TABLE OF CONTENTS
I. Executive Summary..............................................................................................................1
The Need for Review.......................................................................................................................3
Recommendations...........................................................................................................................5
Conclusion ....................................................................................................................................21
II. Introduction........................................................................................................................25
III. History of the Current Regulatory Framework...............................................................31
Broad Overview of the U.S. Financial Services Sector.................................................................31
Depository Institution Regulation and History ..............................................................................32
Futures Regulation and History .....................................................................................................44
Securities Regulation and History .................................................................................................52
Insurance Regulation and History..................................................................................................61
IV. Short-Term Recommendations..........................................................................................75
President’s Working Group on Financial Markets ........................................................................75
Mortgage Origination....................................................................................................................78
Liquidity Provisioning by the Federal Reserve .............................................................................83
V. Intermediate-Term Recommendations.............................................................................89
Thrift Charter ................................................................................................................................89
State Bank Regulation....................................................................................................................99
Payment and Settlement Systems ................................................................................................100
Futures and Securities..................................................................................................................106
Insurance .....................................................................................................................................126
VI. The Optimal Regulatory Structure .................................................................................137
Recommendation Overview.........................................................................................................137
General Choices for Reform ........................................................................................................138
Optimal Structure: An Objectives-Based Regulatory Structure .................................................143
Market Stability Regulator...........................................................................................................146
Prudential Financial Regulator ....................................................................................................157
Business Conduct Regulator........................................................................................................170
VII. Conclusion .........................................................................................................................183

CONCLUSION
The United States has the strongest and most liquid capital markets in the world. This strength is due in no small part to the U.S. financial services industry regulatory structure, which promotes consumer protection and market stability. However, recent market developments have pressured this regulatory structure, revealing regulatory gaps and redundancies. These regulatory inefficiencies may serve to detract from U.S. capital markets competitiveness.

In order to ensure the United States maintains its preeminence in the global capital markets, Treasury sets forth the aforementioned recommendations to improve the regulatory structure governing financial institutions. Treasury has designed a path to move from the current functional regulatory approach to an objectives-based regulatory regime through a series of specific recommendations. The short-term recommendations focus on immediate reforms responding to the current events in the mortgage and credit markets. The intermediate recommendations focus on modernizing the current regulatory structure within the current functional system.

The short-term and intermediate recommendations will drive the evolution of the U.S. regulatory structure towards the optimal regulatory framework, an objectives-based regime directly linking the regulatory objectives of market stability regulation, prudential financial regulation, and business conduct regulation to the regulatory structure. Such a framework best promotes consumer protection and stable and innovative markets.

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