Gramm-Leach-Bliley Act (S. 900): A Major Step Toward Financial Deregulation

Establish a New Financial Services System

The important changes S. 900 would make to the current system include provisions that would put into place a new financial services system. Specifically, S. 900 would:

• Allow banks and securities firms to own the other.
  Over the past two decades, the products offered by banks and securities firms have gradually come to resemble each other. Both types of firms offer checking accounts in which idle balances are invested in stocks or bonds and credit cards. Products for companies are even more closely related. As a result, S. 900 would repeal portions of the 1933 Glass-Steagall Act (P.L. 48-162) that prohibit banks and securities firms from owning each other.

• Establish a new financial services holding company with expanded powers.
  In order to allow one company to offer a wide variety of financial services, S. 900 would create a new financial services holding company that could own separate banking, securities, and insurance subsidiaries. These subsidiaries could operate on both a retail level, offering products to individual consumers, and a wholesale level, underwriting insurance and securities for sale through other companies. Individual subsidiaries would be allowed to sell their products to customers of the other subsidiaries. This ability would mean consumers could meet all of their financial needs at a single source. Since each subsidiary would have its own capital and management, those that ran into trouble could fail without endangering the holding company.

• Prohibit FDIC assistance to affiliates and subsidiaries of banks.
  In the past, the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $100,000, has used federal dollars to prop up the subsidiaries of troubled banks. The agency reasoned that if the subsidiary failed, public confidence in the underlying bank would fall, which, in turn, could cause the entire bank to fail. In order to prevent federal dollars from being used to support subsidiaries conducting risky activities, S. 900 would prohibit the FDIC from assisting them in this way. Instead, subsidiaries and affiliates would need to have enough capital available to finance their activities. In the event of trouble, the FDIC would only be able to help the bank.

• Allow nationally chartered banks to expand their activities.
  Some national banks find it less expensive to conduct financial activities through a subsidiary than through an entirely separate company owned by a holding company. However, there was concern that if these subsidiaries got into trouble, their losses could endanger the bank itself. S. 900 would allow certain types of activities to be conducted through a bank subsidiary as long as the bank is well capitalized and managed. The total assets of the subsidiaries of each bank would be limited to a maximum size of 45 percent of the parent bank's assets or $50 billion, whichever is less.

• Require an antitrust review of any combinations allowed by this law.
  For years, opponents of bank reform claimed that expanding banks' powers would result in a few mega-banks with so much financial strength that they would unduly control the entire U.S. economy. S. 900 requires financial regulators to conduct an antitrust review in order to prevent one financial institution from having too great an influence over the country or over any specific geographic area.

Change the Regulatory Structure

For over 60 years, regulation of financial institutions has been divided among several different agencies, each of which had similar power over a specific type of company. This division of power meant each regulator had a thorough knowledge of the specific circumstances of the firms it regulated, but jealousy of each other made it difficult for anyone to agree on any plan that would allow financial firms to offer new services.

Although S. 900 would not abolish the regulators, it would give the Securities and Exchange Commission (SEC) and the Federal Reserve Board dominant roles in the new system. In addition, the Office of the Comptroller of the Currency (OCC), a part of the U.S. Treasury Department, would maintain significant oversight of national banks. Individual states would continue to regulate the insurance industry. An October 15 agreement between the OCC and the Federal Reserve over the corporate changes needed for a bank to offer new services to customers preserved some of the OCC's powers but, in the long run, the Federal Reserve will most likely eclipse the Treasury agency in regulatory control.

At the same time, S. 900 would abolish the practice of having bank regulators oversee the securities activities of banks while the SEC oversees the same activities at other types of firms. Instead, the SEC would oversee virtually all securities activities. The SEC and the Federal Reserve would have to agree on how to regulate any new products that combine bank and securities activities.

This enhancement of the SEC's role is likely to place it in direct conflict with the Federal Reserve as banking and securities activities increasingly resemble each other. As a result, Congress may be called upon in the future to either referee or merge various financial regulators into one large agency.

Improve the Community Reinvestment Act

The 1977 Community Reinvestment Act attempts to force banks and savings and loan institutions to lend to individuals and businesses in low-income communities. It requires banks to establish a service area for each branch and to prove it is lending to all segments of a community. Every three years, banks have faced burdensome examinations to see if they comply with CRA's confusing paperwork requirements and vague compliance standards.

Under existing law, a bank seeking to merge with another bank or begin a new activity must have a satisfactory CRA rating. However, self-styled community groups can challenge the application and seriously delay the approval process. Such delays can cost banks millions of dollars in extra legal fees and lost business opportunities, so they sometimes submit to agreements that require a certain level of lending and also include "finders fees" and direct cash payoffs to the community organizations.

Today, technological changes are making CRA increasingly irrelevant. Since the law is based on the geographic location of bank units, it will apply to an increasingly small segment of the financial services community as banks move to online activities and freestanding automated teller machines instead of branches.

Despite Senate Banking Committee Chairman Phil Gramm's best efforts, S. 900's significant changes to the CRA will not go far enough. It would:

• Require public disclosure of payments to community groups.
  S. 900 requires all CRA agreements to be made public. In addition, it requires banks and community groups to annually disclose any payments or loans over a certain amount that were made to community groups because of a CRA agreement. This important provision would reduce the ability of self-styled organizations to fund themselves through agreements that are supposed to benefit low-income communities.

• Reduce the regulatory burden of small banks.
  Banks with under $250 million in assets that have an "outstanding" or "satisfactory" CRA rating would be examined less frequently than they are under current law. Banks with "outstanding" ratings would be examined once every five years instead of every three years. Those with "satisfactory" ratings would be examined every four years. This change represents a significant reduction in the regulatory burden CRA would impose on smaller banks.

• Require continued compliance for new activities.
  In a less positive change, S. 900's provisions would actually expand CRA requirements for bank affiliates of financial services holding companies. It would require that all bank affiliates receive at least a "satisfactory" rating before the holding company can be formed. In addition, those banks must maintain that rating in order for the financial services holding company to begin any of the new activities S. 900 authorizes. This requirement would also apply to banks that are not part of a financial services holding company.

Protect Consumer Privacy

For the first time, under S. 900 banks and other financial services firms would be required to develop privacy standards regarding sharing a customer's confidential data with corporate affiliates and other companies. This policy would have be explained to every new customer and provided annually to existing customers. This section of the bill has several major benefits. It would:

• Allow customers to know how confidential information will be treated.
  Instead of hoping a financial services company will treat their personal data as confidential, consumers will receive an explicit disclosure of how such information will be used by the firm. The stated policy must specify how and under what circumstances confidential information, that is not available from other public sources, would be disclosed among the firm's affiliates and other firms. Customers who object to any portion of this policy would be able to take their business to another firm.

• Allow consumers to control how their personal information is shared.
  S. 900 would give customers the explicit right to prohibit financial services companies from sharing their personal confidential information with other non-affiliated firms. Once a consumer makes that decision, financial companies would be prohibited from violating their instructions. Anyone attempting to obtain this information fraudulently by pretending to be the consumer or any similar action could be sent to a federal prison for up to five years.

• Protect both account numbers and access codes.
  Under S. 900, financial services firms would be completely prohibited from disclosing either customer account numbers or access codes to any telemarketer or direct marketing firm.

• Give customers the benefit of full-service financial firms.
  A major benefit of these new financial services supermarkets would be the consumer's ability to obtain traditional products, such as loans, securities, and insurance and any new products from the same source. Since the financial firm already would know each customer's financial history, it would be able to make more rapid decisions on loan applications and other requests.

• Establish protections that are realistic and cost-effective.
  Although some groups have been attempting to scare workers into believing their personal data would be at risk under S. 900, this is simply not true. Its privacy protections are carefully balanced to benefit both workers and companies. Workers receive explicit knowledge about how their information will be used, while companies gain the opportunity to offer a full range of products to customers who qualify for them.