Financial regulation fixes urgently needed: GAO
WASHINGTON (Reuters) - Financial authorities have failed to limit systemic risks, and weaknesses in regulation need to be urgently fixed, according to a congressional report on Thursday.
"Significant reforms to the U.S. regulatory system are critically and urgently needed," the Government Accountability Office said in a report recommending accountability and the flexibility to adapt to market innovations.
"The current system has important weaknesses that, if not addressed, will continue to expose the nation's financial system to serious risks," the report said.
The GAO made several broad recommendations in a framework for Congress, controlled by Democrats, to use as lawmakers craft landmark legislation aimed at addressing the patchwork of banking, securities and futures regulation among federal and state entities.
Overhauling the U.S. regulatory system amid the biggest financial crisis since the Great Depression will be a top priority for Democrat President-elect Barack Obama, who plans to unveil reforms by April to address failures exposed by the subprime mortgage debacle.
Among its recommendations, the GAO said that regulators should be held accountable, rules should cover all activities that pose risks and a system should be flexible so that officials can easily adapt to market changes and new products without hindering innovation.
The report also called for eliminating overlapping federal regulatory missions and enhancing consumer and investor protections.
A major debate among policymakers, Congress and the markets is just how far to take some recommendations made last year by the U.S. Treasury Department to consolidate federal agencies.
The department suggested merging two banking regulators: the Office of the Comptroller of the Currency, a national bank regulator; and the Office of Thrift Supervision, which largely regulates mortgage lenders.
It also recommended merging the Securities and Exchange Commission -- the U.S. markets watchdog criticized for recent failures involving investment banks and the Madoff Ponzi scheme -- and the Commodity Futures Trading Commission.
The GAO said it reviewed comments from 29 federal and state agencies and organizations, including consumer advocates and groups representing the financial services industry.
"The current system was not designed to adequately oversee today's large and interconnected financial institutions, whose activities pose new risks to the institutions themselves," the GAO said in a letter to key members of Congress.
Regulatory lapses contributed to the failure of Washington Mutual, the Seattle-based lender hit by losses from soured mortgages and liquidity problems.
The Federal Deposit Insurance Corporation, which oversees bank failures and administers a fund to protect a limited amount of deposits, said in a letter to the GAO that Congress should retain an independent FDIC charged with protecting deposit insurance and promoting public confidence in the banking system.
But it reached further in its suggestions, saying policymakers should rein in unconstrained leverage at lightly regulated financial firms such as hedge funds and financial guarantee insurers.
"Regulatory reform proposals should also consider statutory mandates for leverage constraints for non-bank financial firms, and well-defined mechanisms to protect taxpayers from the cost of financial bailouts," the FDIC letter said.
(Additional reporting by Karey Wutkowski)
