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May 10, 2010 Monday 10:22 AM EST
A.M. Best Special Report: Banks’ Regulatory Future Springs From Turbulent Past and Present
The global financial crisis has shifted regulation of the U.S. financial sector in historic ways, even apart from any comprehensive regulatory reform. Regulators have expanded existing tools to stabilize a system that had outrun its overseers, but legislative efforts now have the potential to further transform the landscape. Normally, A.M. Best Co.’s analytical focus is on true “banks” (generally meaning depository commercial banks). But regulatory changes that have removed barriers between various types of financial activities occasionally call for a broader discussion. In any such discussion, the popular and ambiguous use of the term “bank” can be confusing. This report carefully distinguishes among traditional commercial banks, thrifts, finance companies, investment banks and securities firms (and their holding companies) and large, diversified financial holding companies. All of these are popularly referred to as “banks,” but they all differ in important ways.— Banking is now regulated through a patchwork of rules and agencies brought forth by major historical events or financial crises.— This historical evolution led to a modular but adaptive system that allows for innovation, targeted regulation and a reduced risk of regulators falling under the sway of those they oversee.— Disadvantages of the system can include duplicative and conflicting regulation; unequal quality of supervision; and disproportionately high regulatory burdens on small banks.— The latest crisis fully exposed the weaknesses of mechanisms that failed to keep up with change, including the advent of nonbanks or shadow banks that may have exploited structural gaps in the current regulatory system, contributing to the causes of the crisis.— The U.S. Government Accountability Office cited major areas in which regulators fell behind, including the emergence of large, complex, global financial conglomerates; the growing role of less regulated entities in the financial system; new, complex and risky products; and an increasing need for global regulatory coordination,— The nature of systemic risk has changed with developments such as the arrival of large hedge funds and the erosion of separation among activities (between banking and investment banking, for example).— A sweeping overhaul of the current structure is a balancing act between the need to address structural issues and the myriad trade-offs, including retaining the competitive stance of the U.S. banking system.To download a PDF copy of all banking special reports at no cost and to access data, analytical methodologies and news on the U.S. banking industry, please visit http://www.ambest.com/banks.
May 11, 2010