The Gramm-Leach-Bliley Act of 1999 (GLB) purports to modernize
the financial services industry by sweeping away the regulatory
structure constructed in the post-Depression period. It is certainly
true that GLB removed the patchwork series of government regulations
that have barred commercial banks, insurance companies and securities
firms from directly participating in one another's business activities.
At the same time, the limited available data suggests that rather
than revolutionizing the financial system, GLB actually builds on
the integration that already exists between banks and other financial
The Gramm-Leach-Bliley Act: What does it allow?
Under the provisions of GLB, commercial banks, insurance companies
and securities firms will be able to more freely affiliate or merge
with one another. GLB accomplishes this through two means. The first
is the creation of a new entity, the financial holding company (FHC),
whose subsidiaries are able to engage in activities that are either
financial in nature or incidental to such activities. Examples of
permissible businesses include traditional banking, insurance underwriting
and agency activity, securities underwriting and dealing, and merchant
banking. The law permits only firms that own banks and that meet
certain regulatory tests, of financial health for example, to become
FHCs and set up these nonbanking subsidiaries. As of March 23 just
under 150 bank holding companies had been authorized by the Federal
Reserve Board to become FHCs.
The second method for exercising new powers is through a subsidiary
of the bank itself rather than the firm or holding company that
owns the bank. These bank subsidiaries can engage in activities
that are financial in nature as well, although they face more restrictions
than the FHC subsidiaries. For example, the bank subsidiary cannot
underwrite insurance, issue annuities or engage in merchant banking
for at least the next five years.
At face value, the expanded powers offered under GLB would appear
to represent a significant step forward in terms of integrating
financial service providers. After all, it is routinely said that
laws passed before GLB did not allow for banking organizations to
engage in securities or insurance operations. However, during the
decades that financial modernization has been debated, considerable
assimilation has already occurred between banking, insurance and
Banks selling insurance
In today's market it is not particularly noteworthy to find a bank
selling insurance. Banks were able to do this given certain legal
exemptions. For example, in the 1990s regulators and courts found
that banks with a national charter and subsidiaries of bank holding
companies could sell insurance in areas with populations under 5,000.
In fact, the regulator of national banks, the Comptroller of the
Currency, found that national bank insurance agency subsidiaries
in these small places could sell insurance nationwide. Some states
have entered the fray as well, granting their own state-chartered
banks broad general insurance agency powers to match those obtained
by their national counterparts.
Exactly how extensive is the sale of insurance by banks? Due to
the haphazard nature in which banks have received their insurance
powers, they currently are not required to report to regulators
information concerning their insurance product sales as a separate
item. Instead, it is lumped together with an amalgam of other types
of noninterest income (see discussion of this type of income in
the October 1999 and
January 2000 issues
of the fedgazette), making it difficult to estimate
the total insurance sales from banks from regulatory data. We do
know that there are roughly 900 bank-affiliated insurance agencies
in the country, representing about 500 unique banking organizations.
Within the Ninth District there are currently 51 banking organizations
selling insurance through 84 subsidiary agencies. According to the
Association of Banks in Insurance, commercial banks sold nearly
$9 billion of insurance products during 1999, an increase of 35
percent from the previous year.
It is worth noting that insurance underwriting—insurance
activities that expose the bank to losses from insurance policies—is
a different story. In general, banking organizations have been prohibited
from engaging in this activity. GLB will allow mass entry by banks
into this field for the first time.
Banks and securities
The 1933 Glass-Steagall Act barred banks from affiliating with
companies that were "engaged principally in" the underwriting and
dealing of stocks, corporate bonds, etc. However, banks were still
allowed to sell and underwrite government securities, municipal
general obligation bonds and certain types of commercial paper.
Additionally, they were able to buy and sell all types of securities
for the account of their customers.
Moreover, the phrase, "engaged principally in," was interpreted
by the Federal Reserve Board in 1986 to mean that a bank holding
company could in fact own a firm that dealt in the prohibited "bank
ineligible" securities—provided the revenue they generated
was less than 5 percent of the company's total revenues. The Federal
Reserve Board has gradually increased the revenue cap that these
"Section 20 subsidiaries" could meet, pushing it up to 10 percent
in 1990 and recently lifting it again to 25 percent. The set of
permissible bank-ineligible securities has also been expanded to
include not only corporate debt and equity but also more exotic
instruments like mortgage-backed and asset-backed securities. There
are 53 Section 20 subsidiaries currently operating today, including
two in the Ninth District that are affiliated with U.S. Bancorp.
Combined, these 53 firms generated over $3 billion in noninterest
income last year—compared with $141 billion in noninterest
income for the nation's 8,500 commercial banks.
In addition to Section 20 subsidiaries, banks have also been able
to perform a variety of functions with respect to mutual funds.
Banking organizations were first authorized by regulators to become
directly involved in mutual fund operations in 1972. Since then,
their roles have gradually expanded to include activities like the
recording of purchases and redemption of fund shares, executing
the portfolio transactions and managing the fund's investment portfolio.
One of the most significant roles played by banks is to serve as
a distribution channel. Banking organizations accounted for roughly
$2.4 trillion in mutual fund sales last year—approximately
90 percent of which were short-term money market mutual funds-and
produced over $4 billion in noninterest income.
What is the real impact of the Gramm-Leach-Bliley Act?
Even if it is not revolutionary, GLB will accomplish at least two
objectives. First, it provides a clear method for future integration
of banks with other financial businesses, as opposed to the haphazard
system that is currently in place. This integration should build
on the connections between banking, insurance and securities operations
that already exist. Second, it will allow banks to enter some new
business lines, such as insurance underwriting, for the first time.
For more on Gramm-Leach-Bliley, see the special issue of The Region magazine that includes discussion and analysis
of GLB, an interview
with Rep. Leach and a historical look at what led to the act's