Financial Update (April-June 2000)
Sweeping Legislation Provides Framework for Financial Modernization
fter years of on-again, off-again discussion and debate, the U.S. Congress last fall hammered out final changes and passed a new law to modernize the U.S. financial system. Termed the Gramm-Leach-Bliley Act of 1999, the new law repealed the Glass-Steagall Acts banking restrictions put into place in the 1930s and updated many of the Bank Holding Company Acts provisions laid out in the 1950s.
The new legislation addresses an array of issues, such as defining activities in which banks and financial holding companies can engage, streamlining bank supervision, defining a banking customers privacy rights and instituting new Community Reinvestment Act (CRA) requirements for nonprofits.
The new act affects a wide range of activities across the banking and financial industry. Some of the acts more notable provisions are discussed in this article.
One-stop shopping: Banking, insurance and securities
Throughout most of the 20th century, commercial banks and holding companies were prohibited from selling insurance without restriction, underwriting insurance not related to the extension of credit and underwriting securities. Under the new law, however, all of these activities are now permissible for any financial holding company. To become a financial holding company, bank holding companies must engage only in activities that are financial in nature, have satisfactory CRA ratings and be well capitalized and managed.
One of the biggest issues debated in passing the new law was whether or not to permit merchant banking activities, such as equity financing, through direct subsidiaries of banks as opposed to financial holding company subsidiaries. The final version of the act prohibits these activities in a bank subsidiary and allows the Federal Reserve and the Treasury to jointly revisit the issue after five years.
Besides merchant banking, the act permits financial subsidiaries of banks to engage in nearly all of the same financial activities in which financial holding company subsidiaries can engage. The size of financial subsidiaries is also restricted by the act: subsidiary assets may not exceed either 45 percent of the consolidated total assets of the parent bank or $50 billion.
Title I of the law took effect on March 11. Certified financial holding companies can now affiliate with, acquire or establish a nonbank financial institution engaging in any activity already authorized by the Federal Reserve Board of Governors under the relevant provisions of Regulations Y and K, authorized explicitly by the Gramm-Leach-Bliley Act or subsequently authorized jointly by the Federal Reserve and the Treasury. A nonbank entity acquiring a bank will still have to apply to the Fed to become a bank holding company and may at the same time file to become a financial holding company.
The new act also made the Federal Reserve the umbrella supervisor of both bank holding companies and financial holding companies, but there are some limitations on the Feds supervisory role. These provisions limit the Feds authority to examine, impose capital requirements on or obtain reports from subsidiaries of financial holding companies that are regulated by the Securities and Exchange Commission or state insurance regulators.
Thats none of your business
Another provision in the new law covers consumer privacy provisions. Title V requires regulators to develop disclosure requirements and consumer opt-out procedures that protect privacy without significantly burdening financial institutions or consumers.
A proposed rule released jointly by federal regulatory agencies for public comment in February would require financial institutions to provide initial and annual notices of their privacy policies to all customers. In addition, the rule would implement the privacy provisions under the new act regarding the disclosure of information that is considered private to third parties that are not affiliated with the financial institution. Before disclosing such information, a financial institution would have to give consumers a description of its privacy policies and provide consumers an opportunity to opt out of the disclosure except when the disclosure is necessary to service or process the transactions.
A final rule will be issued by the regulatory agencies sometime after the comment period for the privacy provision ends March 31.
Let the sunshine in: New CRA provisions
Title VII covers additional provisions of the Gramm-Leach-Bliley Act, most notably the much-discussed CRA sunshine requirements.
The sunshine requirements call for the disclosure of certain types of written agreements in excess of $10,000 or loans in excess of $50,000. (This requirement would not apply to individual mortgage loans or to agreements in which the funds are loaned at nondiscount rates and will not be re-lent to other parties.) Parties involved in such CRA agreements must also annually report to the banks primary regulator the amount and use of any funds expended under the agreement. The annual reporting provision is effective for any agreements made after May 12, 2000, and the public disclosure requirement applies to all agreements made after Nov. 12, 1999.
All of the banking agencies, including the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision, must adopt rules implementing this provision. Currently, these regulators are discussing the goal of adopting uniform rules to the fullest extent possible.
The new law also calls on the Federal Reserve to complete a study examining the performance and profitability of lending by banks and savings and loan associations in conformity with the CRA. In January, the Fed sent a survey to chief executive officers at the 500 largest retail banking institutions, including commercial banks and savings and loans. Surveys were due back to the Fed by March 1, 2000.
Banking regulators are currently involved in a process of proposing rules to support the Gramm-Leach-Bliley Act and will offer banks and other financial institutions the opportunity to comment on these proposals. Through this process, final rules will be adopted to carry out the new law, thereby modernizing bank regulation in the age of advanced technology and global commerce.