Background Considerations To A Regulation Of The U.S. Financial System: Third Time A Charm? Or Strike Three?

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Executive Summary

U.S. financial regulation has traditionally made functional and institutional regulation roughly equivalent. However, the gradual shift away from Glass-Steagall and the introduction of the Financial Modernization Act (FMA) generated a disorderly mix of functions and products across institutions, creating regulatory gaps that contributed to the recent crisis. An analysis of this history suggests that a return to regulation by function or product would strengthen regulation. The FMA also made a choice in favor of financial holding companies over universal banks, but without recognizing that both types of structure require specific regulatory regimes.

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