Introduction: Modernization of Financial Institutions

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I. INTRODUCTION

The financial services modernization legislation of 1999 discussed in this issue of the Journal of Corporation Law came about after years of changes within the banking, securities, and insurance industries. Thus, one fundamental basis for revision of the nation's financial services laws-changes which had been debated for most of the 1990s-was to update the laws to make them current with actual practice. In addition, Congress sought to write a new law that would provide for continued growth in the industry at home and abroad, as well as a law which would allow financial services firms to use new technologies to better serve their individual and business customers. The bipartisan bill that was produced last fall in a House-Senate Conference Committee successfully fulfilled these goals. Whereas under previous law, when banks, insurance companies, and securities firms were broadly constrained in market niches, the new legislative framework allows all financial services firms to compete head-to-head with a complete range of products and services. The law is based upon the following premises:

(1) No parts of America-whether inner city or rural hamlet-should be denied access to credit. Hence, this bill solidifies community reinvestment obligations of banks and makes available new, sophisticated financial services in even the most rural comers of America.

(2) In a free market economy, expanding competition in finance should increase consumer access to a wider variety of products at the most affordable prices. The consumer can be expected to benefit from the cost savings implicit in greater efficiencies of scale and breadth of product offerings. The Treasury, in fact, estimates an $18 billion annual consumer savings.

(3) While competition should be opened up in finance, the American model of separating commerce from banking should be maintained. Indeed, this legislation plugs the current loophole in this system-the ability of commercial firms to own federally insured unitary thrifts.

(4) Privacy protections of American consumers should be expanded in unprecedented ways. While some advocate more aggressive views, it is important to note that this bill provides the greatest consumer privacy protections of any legislation ever considered by Congress. Individuals are given powerful new rights to prevent financial institutions from transferring or selling information to third parties. In addition, pretext calling-the idea that someone can call a financial institution and obtain your financial informationis now effectively outlawed.

(5) The public protections contained in a prudential regulatory regime should be rationalized. Utilizing a functional framework, cracks in the current system are sealed, rather than widened, by provisions of this Act.

(6) The international competitiveness of American firms should be bolstered. Foreign institutions should not be allowed to operate with competitive advantages over American institutions because of this Act.

111. BACKGROUND

To understand where the financial services industry is going, it is relevant to know where it has been. Prior to the enactment of the Gramm-Leach-Bliley Act, financial services were statutorily fragmented into three broad sectors: (1) commercial banking, (2) securities, and (3) insurance. In addition, because banking is a highly regulated industry, subject to significant costs of compliance as well as limitations on activities, a panoply of financial companies outside the reach of bank regulation sprang up and acquired an ever expanding market share in the last decades of the twentieth century.

Foremost among barriers to competition was the Banking Act of 1933,1 several provisions of which came to be known by the names of their authors, Senator Carter Glass and Representative Henry Steagall. The Glass-Steagall Act, born in the aftermath of the failure of 11,000 banks during the Great Depression, established a wall between the commercial banking and securities industries. …