Historic events are funny thingswhat might seem earthmoving
to one person might barely rate above a good TV dinner experience to another.
Take the financial modernization legislation, officially known
as the Gramm-Leach-Bliley (GLB) Act, which allows banks, investment
houses and insurance firms to dally in each other's business like
never before. Signed into law back in November after literally two-plus
decades of trenchwork, it was widely touted in the media and by
industry officials as a law ofpick your adjectivelandmark,
historic and/or groundbreaking proportion. Some have likened it
to the fall of the Berlin Wall (honest).
But these reactions are not widely shared. "If you would
ask the average consumer about Gramm-Leach-Bliley, they would say, 'Who?'
They don't know about it," said Norman Bobins, president and CEO of LaSalle
Bank in Chicago (over $30 billion in assets).
Most people in the financial services industry agree that
while new opportunities and challenges face banks and securities and insurance
firms, the average consumer is not likely to see dramatic changes overnight
as a result of this law.
But over the course of time, maybe just a few years, people
will be buying new and different financial products and services, whether
they realize it or not. The average consumer might not notice the transition,
but that doesn't mean dramatic change is not taking place, according to
"Historians will be able to tell the difference," Bobins
Exactly how-and where-that "difference" will come about
is on the minds of many in the financial services industry. Interviews
with a handful of executives from banks and bank holding companies both
big and small give a different spin on the immediate impact of the law
than the one coming from the mainstream media.
Big banks have been doing smaller-scale versions of what
the law now legalizes for upwards of a dozen years. Smaller banks have
gotten into the act as well through creative retailing arrangements, and
those not already offering nontraditional financial products don't appear
ready or interested in making quick leaps into unknown waters. And of
the many sub-issues addressed by the law, only the new privacy regulations
seemed to consistently spark much opinion.
Tepid first steps
Since the law's passage, industry folks have not been shy about praising
the virtues of the new law, and claiming its spoils.
"Banking, in my view, was the clear winner" in the new
law because it was "broadly beneficial to all banks regardless of size,"
said Don Mengedoth, president and CEO of Community First Bankshares of
Fargo, N.D. ($6 billion in assets), and president-elect of the American
Despite being framed as a banking law, however, both the
securities and insurance industries were very interested in and satisfied
with the new law. Robert Vagley, president of the American Insurance Association
(AIA) called the new law "a resounding victory" for the insurance industry.
"In terms of our objectives we were very satisfied," he said.
Generally, the wish list for insurance and securities interests
was much shorter than that of banks. Over the years, various loopholes
had allowed banks into the insurance and securities business, while shutting
the door on any reverse activities.
The new law "stop(ped) the regulatory encroachment that
we were experiencing over the years," Vagley said. Both industries also
pushed for and received "functional" or activity-based regulation. For
example, rather than having the Securities and Exchange Commission (SEC)
regulate all activities of securities firmsincluding in insurance
or banking areasthe SEC will instead regulate all securities activities,
whether they take place in an investment firm or a bank.
With traditional barriers between banking, securities and
insurance now gone the way of the Edsel, the expectation is that each
industry will cross over into other areas. But despite all of the hullabaloo
over the new law, most banks appear content to watch from the sidelines
to see how things shake out.
"One thing about Gramm-Leach-Bliley is the classic (saying)
of, 'Be careful what you wish for, you just might get it,'" said Bobins.
"We're all scrambling around to see what it all means."
Bobins said LaSalle Bank is looking "very carefully" at
new opportunities for "bringing a complete umbrella of financial service
products" to its customers.
Comerica Incorporated, a $37 billion bank holding company
in Detroit, was being "very deliberate" in any future actions related
to the new law, according to John Doetsch, Comerica assistant vice president
of communications, adding the new law "presents the opportunity to streamline"
certain insurance and securities activities already operating under Comerica.
For banks "in the middle"those regional or subnational
banks with between $1 billion and $20 billion in assetsthe future
is uncertain under the new law, according to Young Boozer, executive vice
president of Colonial Bank of Montgomery, Ala. ($11 billion in assets).
"We're probably one of those in the middle that can't do
it on their own," Boozer said of branching into new financial products
and services. Colonial was still finishing up on Y2K matters, and is in
the midst of absorbing the acquisition of 25 banks in the last three years,
and has not had a chance to put together a strategy regarding new opportunities
under the new law, Boozer said.
Opinion was mixed on the lot drawn by small banks (typically
defined as those with less than $1 billion in assets). Several officials
from larger banks said smaller banks had the ripest opportunity to expand
their offerings. Most executives of small banks, however, don't expect
much change in the near future.
"I don't think it's going to have much of an impact," said
Larry Dreyer, president and CEO of American Federal Savings Bank of Helena,
Mont. ($150 million in assets). The bank might move into new lines of
business in three or four years, he added, "when we have a chance to fully
digest the law."
The typical Montana town has "one local bank, and it has
one local insurance agent who graduated from the high school," Dreyer
said. "I doubt that those small banks are going to go running to sell
these new products."
"Our opportunities are limited in the rural areas to start
with," said Jerry Melby, president and CEO of First National Bank ($34
million in assets) in Bowbells, N.D., with a population of 498. With an
aging customer base in the northwest corner of the state, Melby said he
doesn't see much of a market for new products because his asset base is
deteriorating. Coupled with the poor state of agriculture, asset flight
has ensued as older customers pass away and leave their estate to heirs
who often live in metropolitan areas, he said.
Western Bank ($50 million in assets) is the only bank in
the small town of Lordsburg, N.M., population 2,951in "the (southwestern)
corner of the state in the middle of nowhere," said bank president Robert
Martin. With its focus on ranching, farming and tourism, "I don't see
that [the new law] is going to have much of an effect" on the bank or
on the economic health of the city, Martin said.
Proponents of the new law championed changes to the Federal
Home Loan Bank (FHLB)which eased eligibility requirements and access
to loan fundsas a saving grace for small banks in rural communities.
A survey of banks in the largely rural Ninth Federal Reserve District
showed that eight in 10 bankers said the provision was either moderately
or very important to their bank (see article on banker survey--link!!).
A separate analysis by the Minneapolis Fed found that almost 900 banks
nationwideabout 60 percent of which were ag bankswere newly
eligible for FHLB membership and its more-generous lending allowances.
(Ron Feldman and Jason Schmidt, "Agricultural Banks, Deposits and FHLB
Funding: A Pre- and Post-Financial Modernization Analysis," Journal
of Agricultural Lending, Winter 2000, pp. 45-52.)
Changes to the FHLB were "definitely positive" for community
banks, according to Julian Hester, CEO of the Community Bankers Association
(CBA) of Georgia, whose members average just $125 million in assets. Aggressive
banks will take full advantage of new borrowing opportunities, Hester
But what looks good on paper might not fly so well in practice.
Martin, for one, said these changes would not be of any help to Western.
With a 55 percent loan-to-asset ratio (well above even previous debt ratio
thresholds), the bank didn't need easier credit-it needed more people
walking through the doors for consumer and business loans.
One president of a small agricultural bank in rural Kansas
admitted he had not even heard about the new law or its FHLB provisions.
In the midst of a severe drought throughout the state, he said he was
paying more attention to the weather than to anything coming out of Washington.
If the area didn't get rain in the next 60 days or so, he said, "we're
going to be in a world of hurt."
Back-drafting: Allowing what's already occurring
One of the big reasons for a seemingly slow bank reaction to the new law
is simple: Many banks and bank holding companiesboth big and smallwith
an interest in providing insurance or securities products are already
For example, starting in 1987, the Board of Governors of
the Federal Reserve System began approving proposals to allow affiliates
of banks to underwrite and deal certain low-risk securities (like municipal
revenue bonds). These proposals had to be consistent with Section 20 of
the Glass-Steagall Act and the Bank Holding Company Act requiring that
banks not be "engaged principally" in securities, which was originally
defined as contributing not more than 5 percent of an affiliate's total
Two years later, the Fed Board started approving applications
for any type of debt or equity security except open-ended mutual funds,
and gradually lifted the revenue bar to 25 percent of an affiliate's revenue.
Not surprisingly, numerous banking companiesespecially big onesstarted
using this route as an end run around Glass-Steagall.
Of the top 20 largest U.S. bank holding companies-whose
assets range from about $700 billion (Citigroup) to $55 billion (State
Street Corp.)-85 percent had Section 20 subsidiaries engaging in the underwriting
and dealing of securities. All told, 45 different U.S. and international
holding companies have 52 Section 20 subsidiaries.
"What's it [the new law] mean? Not that much because we're
already in securities," said one source with a Fortune 500 bank who wished
to remain anonymous.
A 1986 ruling by the Office of the Comptroller of the Currency
allowed national banks to sell insurance from branches in towns under
5,000 in population, and a new loophole was born. Most often, such products
were offered indirectly through dealer-broker arrangements, where the
bank acts as a retail distributor of sorts, has no product ownership,
and receives commission from any sales.
The National Institute Companies of America (NICA) has
been helping community banks do just that for the past 14 years. As a
broker between financial service providers and community banks, it arranges
seminars in community banks for licensed agents hawking a wide variety
of insurance and other financial planning services and products.
According to NICA president Kevin Maloney, banks get a
25 percent commission on all subsequent sales, and save on costs related
to "ramping up" a new line of business because everything is provided
by NICA. It runs seminars in about 300 community banks nationwide every
year, he said.
American Federal prefers just such a partner approach,
Dreyer said. Rather than create and underwrite new securities and insurance
productsnot to mention having to maneuver through the regulatory
hoops for each"we just went ahead and identified someone to provide
those services on our premise," Dreyer said. "I don't see (new products)
as something we're ready to jump on."
Many banks appear to need a push even for the partnering
route. The CBA of Georgia established a joint marketing program to help
community banks offer full-service insurance, giving banks virtually all
the expertise needed to sell the services and products of up to 50 insurance
companies within a matter of weeks, according to Hester. "We can drop
an insurance agency in a bank in 30 days," Hester said.
But despite the ease of doing so, only five banks contracted
with the association in the last half of 1999 for this insurance start-up
program. The association recently surveyed its membership of 330 banks,
and just 40 of 100 respondents planned to get into full service insurance
in the next 12 months, according to Hester.
"Banks are not willing to diversify as much as they need
to," Hester said.
Even among big banks, partnering in a broker-dealer arrangement
for insurance products is a more likely scenario than banks creating and
underwriting their own insurance products. Margins on insurance products
are poor compared with banking, said Vagley of the AIA, "and banks are
not all that enamored of the vagaries of underwriting."
Privacy no longer a secret
Aside from general barrier elimination, new regulations on privacy were
the only subissue in the GLB Act that regularly struck much of any chord
with those interviewed.
Vagley of the AIA called the privacy measures in the law
"the most sweeping privacy regulations ever passed." The law requires
clear and annual disclosure of privacy policies in the sharing of sensitive
personal information with affiliates and third parties, and the opportunity
for consumers to "opt-out" of any information-sharing agreements with
Privacy was the top concern for consumers, according to
a number of bankers. "People want to be sure their information is protected
and not used inappropriately," said Boozer of Colonial Bank.
Mengedoth of Community First Bankshares said there were
"some far-reaching" provisions in the privacy law "that people don't know
about and won't for the next six months."
Due to a purposefully broad definition of financial services,
the new law requires some companies with no previous reporting responsibilities
to institute and report on their privacy practices, Mengedoth said. For
example, there are some half-dozen leasing companies in Fargo "that under
the definition is a financial services company and will have to report
(their) privacy processes," he said. "There's going to be some gnashing
Mengedoth pointed out that the new law establishes the
first federal legislation on privacy, but would be just the first part
"of an ongoing stream" of privacy measures that consumers will see from
Washington in the coming years.
"Clearly we don't believe the final chapter on [privacy]
has been written," Mengedoth said. "Most rhetoric on this (issue) said
it didn't go far enough."
New federal "opt-out" regulations require consumers to
ask to be removed from information-sharing agreements with third parties,
but did not preempt states from drafting their own privacy laws. A number
are already considering "opt-in" proposals whereby customers would have
to volunteer to share personal information with interested third parties,
according to Fritz Elmendorf, vice president of communications for the
Consumer Bankers Association, a retail banking association representing
(among others) 85 of the top 100 banks.
"There's a lot of action in the states. That's evidence
that a lot more is going on" with regard to privacy, Elmendorf said, adding
that such a scenario is "very frightening to many in the banking industry."
The privacy issue appears to be less of an issue for smaller
banks, several people said. [Community banks] "are not big enough to be
in the business of selling information," Hester said. "I don't see [the
new privacy regulations] as a problem at all."
a full year, and only a few minor changes will be needed for their published
material to be in compliance. Dreyer said the bank has never shared customer
information with third parties, and has no plans to in the future. "So
we don't care if they have tough (privacy) restrictions or not," Dreyer
"We've had a hard and fast rule that we don't share proprietary
information," said Ben Haines, president of First Security Bank of Southern
New Mexico, a $500 million affiliate of the First Security Corp. Calling
information protection "the cornerstone of (banking) industry ethics,"
Haines added, "It's amazing to me this is even an issue."
"Our industry should have never had allowed the proprietary
information issue to become an issue," Haines said, adding that "now that
the camel's nose is under the tent," the privacy issue will only become
A financial services evolution, not revolution
To the last, those interviewed agreed that change in the financial services
industry would be deliberate. Part of the reason is that until May of
this year, banks are in a holding pattern until the Fed and other regulators
issue specific rules on many parts of the new law.
But awareness and apathy also appear to be significant
problems among bankers. To combat the awareness problem, Mengedoth said
the American Bankers Association has created a task force to promote important
changes of the new law to its members.
Hester acknowledged there was low awareness of the law
among community banks. "I don't think enough people have enough interest
in this," Hester said. "I'm ashamed of that."
The reason is because "everybody's doing real well" in
banking today, Hester said. Coming off a smooth transition from Y2K, "bankers
can look around them and say, 'God, the world is great.'" Compounding
the problem is the fact that "bankers are not interested in politics and
regulation," Hester said.
Bankers have long known such changes in the industry were
coming, and publicly professed to be ready and willing to move with the
times, Hester said. But bankers "didn't think the future was ever going
to get here," he said. "If they don't (change), somebody's going to take
their place. ... Some are going to end up being country stores."
But caution and sure-footedness are also common traits
among bankers, several sources pointed out. Bankers, said Maloney of NICA,
"are suspenders and belts" types who are typically "slow to take that
potential leap into a new sector."
"They are very cautious people, which is good for us,"
Maloney said. Bankers will pursue new opportunities only when they see
the efficacy of such a move. "I think [implementation] will be a slow
process," Maloney said.
This conservative mind-set means the financial modernization
law will likely usher in an evolution, not a revolution, in banking. So
gradual will the changes be that consumers are not likely to notice the
incremental steps taken as the financial services company of the future
Ultimately, banking customers "will begin to see more expertise
in their bankers" as a result of financial reform, Mengedoth said. The
movement will be toward financial consulting and a "relationship where
needs change" from starting a checking account to buying a car, a first
house, kids' education and finally retirement. This will require bankers,
insurance brokers and securities specialists alike to be cross-trained
to sell and manage a new financial services portfolio, he said.
But to Bobins, the unknown and yet-to-be-defined element
is the biggest asset of the financial reform legislation. The repeal of
Glass-Steagall, he said, "allows people to start thinking more creatively
than they have before." Prior to the new law, valuable resources were
spent trying to determine whether certain activities were allowed, and
how to maximize your options under the law.
The new law "frees up people's thinking going forward,"
Bobins said, "It takes you out of the box."