November 2, 1999

November 2, 1999 | Commentary on Regulation

A Banking Bill Only an Activist Could Hate

To hear consumer advocates tell it, the most important banking bill in more than 60 years would cut off bank loans to minorities and put the personal financial information of Americans on the Internet for everyone to view. It's not true of course, but that never keeps the self-appointed guardians of the public good from their appointed rounds.

The Gramm-Leach-Bliley Act, which could receive final approval from Congress and be sent to the president's desk as early as this week, recognizes that America's financial-services industry has changed since the last major banking bill was enacted during the Depression. The new legislation would repeal the obsolete Glass-Steagall Act that has prevented banks, securities firms, insurance companies and other financial institutions from teaming up to offer customers a fuller menu of services.

Former Treasury Secretary Robert Rubin has said this change could save consumers $15 billion a year in fees paid to banks, brokers and insurance sellers. The measure also has broad bipartisan support ranging from the Clinton administration to the Republican leadership in Congress to bank regulators.

So why the controversy? Largely because of a small provision in the bill that would open the 1977 Community Reinvestment Act to greater scrutiny.

The CRA was established to "encourage" banks to lend more money in minority communities. But it's turned into a license to commit extortion. "Community groups" and other agitators can contest mergers and block applications to launch new services by claiming that a particular bank is not lending enough money to minorities or low-income neighborhoods. These protests cause delays that can cost banks millions of dollars in legal fees and lost business opportunities. To get the protests dropped, banks agree to make millions or even billions worth of loans to low-income areas. These agreements are always made public and trumpeted by the community groups as victories for social justice.

In private, however, some community activists are pursuing deals that coerce banks into making direct payments to the activists before the protests are dropped. One such agreement required the bank to pay $45,000 to the protesting group for administrative and so-called "soft" costs and to buy the group a small apartment building. Another forced the bank to pay $200,000 for administrative costs and a fee of 2.75 percent of the amount of any loans made as a result of the larger agreement. Yet another bank was forced to buy off the community group by giving it $750,000 annually for 10 years, $200,000 to set up new offices, and $2,000 for each loan made. If banks don't sign these agreements, activists begin picketing the bank and the community organization does all it can to delay the application in question.

The best way to halt this legalized extortion is to make public the secret agreements between banks and community groups. Which is precisely what the Gramm-Leach-Bliley Act would do. It requires an annual report from both banks and community groups that participate in CRA agreements. Needless to say, the community groups aren't happy about this, going so far as to charge that the Clinton administration has sold them out.

No less absurd an objection to the legislation is the privacy bogeyman conjured up by those who think the bill will result in consumers' sensitive financial information becoming widely available. In reality, the legislation gives consumers greater control over their personal financial data than they have now. It requires financial institutions to write a privacy policy and tell every customer what it is. It also allows customers to prohibit financial institutions from sharing their private financial data with other companies.

Consumer groups aren't satisfied. They want to go so far as to prevent one unit of a financial company from sharing information with another. This is similar to prohibiting the produce section of the grocery from knowing that you bought meat, or the pharmacy from knowing that you bought a box of tissues. In short, activists have cooked up a non-crisis, which is always the easiest kind to solve.

Deregulating the financial-services industry is a smart move that would help American consumers and make U.S. financial companies more competitive in the global arena. The activists who say otherwise are promoting a different agenda - their own.

David C. John is a senior policy analyst at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Regulation

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