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.Thesedevelopments, while providing benefits to both domestic and global economic growth,have also exposed the financial markets to new challenges.Globalization of the capital markets is a significant development.Foreign economies arematuring into market-based economies, contributing to global economic growth andstability and providing a deep and liquid source of capital outside the United States.Unlike the United States, these markets often benefit from recently created or newlydeveloping regulatory structures, more adaptive to the complexity and increasing pace ofinnovation.At the same time, the increasing interconnectedness of the global capitalmarkets poses new challenges: an event in one jurisdiction may ripple through to otherjurisdictions.In addition, improvements in information technology and information flows have led toinnovative, risk-diversifying, and often sophisticated financial products and tradingstrategies.However, the complexity intrinsic to some of these innovations may inhibitinvestors and other market participants from properly evaluating their risks.For instance,securitization allows the holders of the assets being securitized better risk managementopportunities and a new source of capital funding; investors can purchase products withreduced transactions costs and at targeted risk levels.Yet, market participants may not fullyunderstand the risks these products pose. Introduction 23The growing institutionalization of the capital markets has provided markets withliquidity, pricing efficiency, and risk dispersion and has encouraged product innovation andcomplexity.At the same time, these institutions can employ significant degrees of leverageand more correlated trading strategies with the potential for broad market disruptions.Finally, the convergence of financial services providers and financial products hasincreased over the past decade.Financial intermediaries and trading platforms areconverging.Financial products may have insurance, banking, securities, and futurescomponents.These developments are pressuring the U.S.regulatory structure, exposing regulatorygaps as well as redundancies, and compelling market participants to do business in otherjurisdictions with more efficient regulation.The U.S.regulatory structure reflects asystem, much of it created over seventy years ago, grappling to keep pace with marketevolutions and, facing increasing difficulties, at times, in preventing and anticipatingfinancial crises.[4]Largely incompatible with these market developments is the current system of functionalregulation, which maintains separate regulatory agencies across segregated functional linesof financial services, such as banking, insurance, securities, and futures.A functionalapproach to regulation exhibits several inadequacies, the most significant being the factthat no single regulator has all of the information and authority necessary to monitorsystemic risk, or the potential that events associated with financial institutions may triggerbroad dislocation or a series of defaults that affect the financial system so significantly that thereal economy is adversely affected.In addition, the inability of any regulator to takecoordinated action throughout the financial system makes it more difficult to addressproblems related to financial market stability.Second, in the face of increasing convergence of financial services providers and theirproducts, jurisdictional disputes arise between and among the functional regulators, oftenhindering the introduction of new products, slowing innovation, and compellingmigration of financial services and products to more adaptive foreign markets.Examples ofrecent inter-agency disputes include: the prolonged process surrounding thedevelopment of U.S.Basel II capital rules, the characterization of a financial product as afutures or a security contract, and the scope of banks insurance sales.Finally, a functional system also results in duplication of certain common activitiesacross regulators.While some degree of specialization might be important for theregulation of financial institutions, many aspects of financial regulation and consumerprotection regulation have common themes.For example, although key measures offinancial health have different terminology in banking and insurance (i.e., capital andsurplus, respectively) they both serve a similar function of ensuring the financial strength andability of financial institutions to meet their obligations.Similarly, while there are specificdifferences across institutions, the goal of most consumer protection regulation is to ensureconsumers receive adequate information regarding the terms of financial transactions andindustry complies with appropriate sales practices.In this report, Treasury presents a series of short-term and intermediate-term recommendations that could immediately improve and reform the U.S.regulatorystructure.The short-term recommendations focus on taking action now to improveregulatory coordination and oversight in the wake of recent events in the credit andmortgage markets.The intermediate recommendations focus on eliminating some of the 24 Martin T.Bannister (Editor)duplication of the U.S.regulatory system, but more importantly try to modernize theregulatory structure applicable to certain sectors in the financial services industry (i.e.,banking, insurance, securities, and futures) within the current framework.Treasury also presents a conceptual model for an optimal regulatory structure.Thisstructure, an objectives-based regulatory approach, with a distinct regulator focused on oneof three objectives (i.e., market stability regulation, safety and soundness regulation associatedwith government guarantees, and business conduct regulation) can better react to the pace ofmarket developments and encourage innovation and entrepreneurialism within a context ofenhanced regulation.This model is intended to begin a discussion about rethinking thecurrent regulatory structure and its goals.It is not intended to be viewed as alteringregulatory authorities within the current regulatory framework.Treasury views thepresentation of a tangible model for an optimal structure as essential to its mission topromote economic growth and stability and fully recognizes that this is a first step on a longpath to reforming financial services regulation.In preparing this report, Treasury requested public comment on a variety of issuesrelating to financial services regulation.In October 2007, Treasury published a requestfor public comment in the Federal Register on both general issues related to financialregulation as well as specific issues related to depository institutions, futures andsecurities markets, and insurance.The notice is attached hereto at Appendix A.The morethan 200 responses received are publicly available.[5]The amount and variety of comments are testimony to the importance and broad interestthat these issues provoke.Investors, domestic and global financial institutions, tradeassociations, regulators, academics, and other market participants have providedcomments.Submissions generally included thoughtful and detailed suggestionsaddressing both the issues raised by Treasury in the request and additional topics which therespondents believed merited attention [ Pobierz całość w formacie PDF ]