Thank you, Peter. And thank you for organizing this important event to assess the impact and implications of the Gramm-Leach-Bliley Act--legislation that Jim Leach has rightly described as "the most important banking reform since the Federal Reserve Act of 1913."
As some of you may recall, during the period leading up to passage of the Act, I was a member of both the House banking and commerce committees. Indeed, Gramm-Leach-Bliley--and the work that went into it--looms very large in my recollection of my time in Congress, so I’m very pleased to have been invited to participate this morning. Let me also extend a warm greeting to the other panel members. I look forward to hearing your comments and insights.
As Peter mentioned, I am here as president and CEO of the Financial Services Forum. Since the Forum is a relatively new organization, and since my comments will, at least in part, reflect my association, let me begin by giving a quick description of the Forum and its objectives.
The Financial Services Forum was organized in February of 2000, following the enactment of GLBA. It is composed of the chief executive officers of twenty-one of the largest and most diversified financial institutions in the United States--commercial banks, securities and insurance companies, and specialized financial firms.
The purpose of the Forum is to promote policies that enhance savings and investment in the United States, and that ensure an open, competitive and sound financial services marketplace.
Issues of current interest to the Forum include retirement security, financial privacy, regulatory convergence, international standards, the promotion of international trade, and financial institutions’ role in combating terrorism.
The member CEOs meet as a group twice a year, although the Forum’s various task forces and sub-groups meet more frequently. The Forum contributes to public understanding and policy making by sponsoring conferences and symposia, commissioning white papers, and placing opinion pieces and public service advertisements.
With that said, let me move on to the topic at hand.
When President Clinton signed the Gramm-Leach-Bliley Act into law two years ago yesterday, expectations ran high. Supporters asserted that the legislation would be a boon for both the consumers and producers of financial services.
The president himself estimated that American consumers would save as much as $18 billion a year, as financial conglomerates--newly permitted by the Act--achieved significant economies of scale. Then-Treasury Secretary Larry Summers stated that, by making it easier and cheaper for banks, securities firms and insurance companies to diversify, the Act would reduce financial risk and "better enable American companies to compete in the new economy." New York Senator Chuck Schumer echoed the Secretary’s comment, saying: "There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive." Many others predicted the legislation would greatly accelerate the consolidation trend already underway within the financial services industry.
Given such high expectations--and given that the Act was unquestionably the most important piece of financial legislation in nearly 70 years--it is fitting that, as we mark the Act’s two-year anniversary, we pause to assess whether such expectations were indeed fulfilled and, if not, why not?
So, has the Act met expectations? As tends to be the case in matters of broad policy, the answer, I think, is both "yes" and "no."
On the "yes" side, since passage of the Act in November of 1999, more than 500 financial holding companies--companies permitted to own banking, securities and insurance subsidiaries--have been formed.
Moreover, though GLBA was originally perceived by some to principally benefit large institutions, companies of all sizes have taken advantage of the strategic freedom authorized by the Act. Indeed, of the more than 500 companies that have become FHCs, nearly 85 percent have total assets of less than $1 billion and, of those, nearly half have assets of less than $150 million.
At the same time, other aspects of the story that has unfolded seem out of line with original expectations. Perhaps most notably, only 5 FHCs--or less than 1 percent of the total--have been formed by non-banks. The membership of the Financial Services Forum reflects this imbalance: all of our commercial banking members are now FHCs, while, to date, only one non-bank--MetLife--has become an FHC.
On the one hand, these circumstances are not terribly surprising. GLBA, while historically and statutorily significant, was, to a great extent, reinforcing of trends already underway.
For example, following the Federal Reserve’s liberalization of the rules governing Section 20 subsidiaries in 1996, several dozen securities firms were acquired by bank holding companies. In fact, it’s my guess that most bank holding companies that wanted to engage in securities dealing probably already were--prior to passage of GLBA.
On the insurance side, while banks have engaged in agenting activities for years, particularly following the Supreme Court’s 1996 Barnett Bank decision, it remains unclear whether more than just a few have any real interest in underwriting insurance. Moreover, many insurance firms remain mutual companies, which prevents mergers and acquisitions--at least until they became stock companies.
Still, the fact that less than one percent of the FHCs formed have been non-bank driven seems altogether inconsistent with Congress’ intent in passing the Act. This observation is underscored by the fact that the convergence of financial products--a process driven by technological advancement and underway for years--has not only continued but seems to be accelerating.
And, ironically, the principal explanation for this imbalance seems not to be a matter of economic logic or strategic priorities, but rather one of regulatory arrangements.
GLBA established a two-tiered framework of supervision for the newly authorized financial holding companies. As the "umbrella supervisor," the Federal Reserve now assesses the consolidated capital adequacy and risk management systems of FHCs, while relying "to the fullest extent possible" on information provided by the "functional regulators"--the SEC, state insurance departments and the CFTC--regarding the activities and condition of FHCs’ non-bank subsidiaries.
This two-tiered framework of supervision has given rise to a number of practical problems. For example, while bank holding companies diversifying into securities or insurance activities are not subject to an additional layer of regulation at the holding company level--they are already supervised by the Fed--non-banks expanding into banking become subject to supervision by the Federal Reserve. In the view of many non-banks, the costs associated with this additional regulatory burden exceed the benefits of the contemplated diversification.
In addition, the "reason to believe" language in GLBA regarding the Fed’s authority to by-pass functional regulators and examine a securities or insurance subsidiary of an FHC leaves the criteria for such intervention troublingly vague for many non-banks.
To better understand the reluctance of non-banks to become FHCs, members of the Forum’s staff recently conducted a series of interviews with our non-bank members. The principal conclusions of these discussions included the following:
The non-bank members surveyed are of the view that, regardless of charter, financial institutions should be able to fully diversify their business--i.e., enter commercial banking, trust banking, securities, insurance, investment management and principal private equity investing--without incurring punitive costs. In other words, a securities firm or insurance company ought to be able to compete on an equal regulatory footing--whether or not it happens to be affiliated with a commercial bank. The non-banks surveyed also agree that, to date, implementation of GLBA has not achieved this desired goal.
With the exception of MetLife, non-bank Forum members have eschewed FHC status, citing the prospective burden of additional regulation by the Federal Reserve--in particular, onerous capital requirements and risk examinations, a cumbersome rule making process, and, as I mentioned, vague criteria for Fed intervention into non-bank subsidiaries.
Most of the firms surveyed own specialty, bank-like entities--thrift holding companies, industrial loan companies, off-shore banking licenses, article XII vehicles, etc.--that "allow us to do what we want to do." At the same time, some of the entities surveyed acknowledged that their current situation may not be responsive to their needs down the road. Investment banks, for example, are increasingly subject to pressure from commercial banks offering substantial credit lines in return for M&A and equity underwriting business. Still, the non-banks surveyed agree that, over the near to medium term, FHC status does not offer significant enough benefits, given the associated costs, to warrant declaring.
The surveyed firms reported using risk management and capital allocation methodologies considered by many of those interviewed to be more rigorous than techniques commonly used by banks, and more robust than what the Fed requires--implying potentially higher capital requirements for these firms if they were supervised by the Fed.
Most of the surveyed firms favor some regulatory consolidation, but believe it is unrealistic to expect significant change in the near future. Moreover, an effort to provoke such change is generally regarded as imprudent and probably futile at the moment. There is some interest in a Federal charter option for insurance companies, which most believe can be obtained without the need to become an FHC. The Treasury Department’s rumored interest in regulatory consolidation has been noted and is being monitored. No desire to challenge the Fed’s regulatory purview was expressed.
Finally, most of the members surveyed expressed interest in establishing a communications link between non-banks and the Fed regarding GLBA and other regulatory issues. It was thought the best approach might be informal meetings with the Board of Governors in Washington, with New York Fed staff participating, on a quarterly basis regarding a pre-agreed agenda. In addition, each side would be available for on-call meetings to pursue special topics and situations as they arise.
Let me wrap up by saying that I think we would all agree that the passage of GLBA was a monumental accomplishment that has, and will continue, to benefit both consumers and providers of financial services. I think it is also clear, however, that passage of the Act was not an end but a beginning.
I look forward to our discussion this morning, and to working with these and other colleagues to realize the full potential of this most important piece of financial legislation.