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One Year After Gramm-Leach-Bliley: Are We Modern Yet?

Sunday, April 1, 2001

The Gramm-Leach-Bliley Act (GLB), which became effective March 11, 2000, was hailed as landmark legislation, modernizing the U.S. financial services sector. By tearing down the legal barriers between commercial banking, investment banking and insurance, it was thought that GLB would lead to dramatic new efficiencies, the rise of huge financial conglomerates, exciting new financial products and substantial savings to consumers.

Because of GLB, financial holding companies (FHCs) may now engage in any business that is financial in nature. This includes selling and underwriting securities and insurance, and merchant banking—providing venture capital and making other investments in commercial firms.

The List: The procedures in Regulation Y allow financial institutions to request that the Federal Reserve Board:

  1. Decide whether a particular activity is within the scope of a permissible financial business, and
  2. Add a new activity to the list of permissible businesses. The Board, in consultation with the Secretary of the Treasury, has already begun expanding the list:

Finders: On Dec. 19, 2000, the Board added acting as a finder to the list. A finder is a commercial matchmaker, locating and matching third parties that are interested in engaging in a business transaction. Finders also may act as a conduit for transaction-related information between parties. For example, a financial holding company may now host an Internet marketplace.

Real Estate: Recently, the Board also sought public comments on whether banking organizations should be permitted to engage in real estate brokerage and management. Real estate brokerage is similar to acting as a finder. It involves bringing together parties interested in consummating a real estate transaction and negotiating a contract on behalf of such parties. Real estate brokerage services include listing and advertising real estate, conveying information between the parties and administering the closing. The real estate community has not reacted favorably to this proposal. Comments initially were due by March 2, 2001; however, the comment period has been extended to May 1, 2001.

Real estate management services are related to day-to-day activities such as procuring tenants, negotiating leases, maintaining security deposits, billing and collecting rent payments, and overseeing inspection, maintenance and upkeep of real property. At this time, the regulatory agencies are not considering permitting real estate investment or development.

Venture Capital: The final merchant banking rule, which became effective Feb. 10, 2001, permits financial holding companies to make investments in commercial firms, subject to certain limitations and reporting requirements. The rule prohibits financial holding companies from routinely managing or operating the firms they invest in and limits the length of time that such investments may be held.

Financial Holding Companies (FHCs): Although GLB permits banking organizations to engage in many new financial businesses via financial subsidiaries of banks, to date the FHC structure seems to be much more popular. Nationwide, almost 600 bank holding companies—550 domestic and 45 foreign—already have converted to FHCs. In the Eighth District, there are now 44 FHCs, and one state member bank has a financial subsidiary.

There have been a few blockbuster mergers of large banking, insurance and securities firms; however, the real surprise is that most new FHCs are community-banking organizations. Many are interested in the expanded insurance-agency powers, but it appears that many others have converted to FHCs without any immediate plans to engage in new financial businesses.

The Full Impact: Although GLB has paved the way for financial modernization, we are only just beginning to see signs of the development of one-source financial superstores. Most banks have cautiously approached their expansion into new financial services. Perhaps it is still too early to tell whether GLB was a revolutionary leap forward or merely a necessary, evolutionary step in regulating financial services.

One thing is certain: The Board and the other regulators have been quite busy during the last 12 months writing new regulations. You may access Board announcements about these regulations at