President's Message: Modernization for the New Millennium

On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. This historic law modernizes the way the U.S. financial services sector is regulated by tearing down old laws that stood as barriers to competition between commercial banking and the securities and insurance businesses.

Gramm-Leach-Bliley razes the Depression-era Glass-Steagall Act, which barred commercial banks and securities firms from competing on each other's turf or forging financial services conglomerates. Glass-Steagall was created because lawmakers believed the widespread bank failures that occurred during the Depression were caused by bank involvement in the securities business. This belief has now been widely discredited. Gramm-Leach-Bliley also repeals provisions of the Bank Holding Company Act, which barred affiliations between banks and insurance companies and prohibited banking organizations from engaging in the insurance business.

So who benefits by the dismantling of these outmoded laws? The answer is, just about everyone. Banks, insurance companies and securities firms now have the ability to escape their narrow market niches and compete head-to-head by selling a full range of financial products and services. Consumers benefit by having unfettered access to a wider array of products—products that will be delivered more efficiently than in the past. In fact, the U.S. Treasury estimates that consumers will save $18 billion annually because of the new law. Speaking more broadly, I believe the U.S. economy will benefit from heightened competition among financial organizations. Vigorous competition leads to greater innovation, and innovation is a critical element to our domestic financial architecture, especially in an increasingly global economy.

Another aspect of the legislative overhaul that shouldn't escape notice is the resulting reduction in certain regulatory burdens and inefficiencies. Regulators will no longer be working in silos or duplicating efforts. Rather, they will be working hand-in-hand to ensure the safety and soundness of the new financial conglomerates that will naturally evolve in response to the legislative changes. Existing banking regulators will also be joined by a new one: market forces. Large national banks, for example, will be able to underwrite securities only if they can get a national rating organization like Moody's or Standard & Poor's to give their corporate debt issue a high rating—for example, an S&P AAA.

Spurred in part by technological advances, the financial services sector has been evolving at a rapid pace—some might say a revolutionary pace. I believe this legislation is a timely, rational response to the demands of the new millennium, and I look forward to the challenges and opportunities the new, barrier-free landscape provides.