Academic journal article Federal Reserve Bulletin

Testimony of Federal Reserve Officials

Academic journal article Federal Reserve Bulletin

Testimony of Federal Reserve Officials

Article excerpt

Statement of Laurence H. Meyer, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, U.S. House of Representatives, May 2, 2001

Mr. Chairman and members of the subcommittee, thank you for the opportunity to testify on behalf of the Federal Reserve Board with respect to the joint proposal by the Board and the Secretary of the Treasury relating to real estate brokerage and management. The proposal is an invitation for public comment on whether the Board and the Treasury should find that real estate brokerage and real estate management are activities that are financial in nature or incidental to a financial activity and hence permissible for financial holding companies and financial subsidiaries of national banks. The agencies published the request for comment on January 3, 2001. Because of the significant public interest in the proposal, we extended the public comment period through May 1, 2001.

To help understand why the agencies requested comment on this proposal, I think it would be helpful to outline the legal framework established by the recently enacted Gramm--Leach--Bliley Act (GLB Act) and the basis for the proposal. The GLB Act amended the Bank Holding Company Act to allow a bank holding company or foreign bank that qualifies as a financial holding company to engage in, and affiliate with companies engaged in, a broad range of financial activities. The activities specifically authorized by statute include lending; insurance underwriting and agency; providing financial advice; securities brokerage, underwriting, and dealing; and merchant banking activities.

In addition, the GLB Act permits financial holding companies to engage in other activities that the Board determines, in consultation with the Secretary of the Treasury, to be "financial in nature or incidental to a financial activity." The GLB Act includes this flexibility because the Congress recognized the practical difficulties of comprehensively defining in legislation a complex concept like financial activities for a financial marketplace that is continually evolving. Further, the act allows financial holding companies to engage in other activities that the Board determines are "complementary" to a financial activity and would not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Complementary activities are nonfinancial activities that are related to or complement financial activities. The Congress considered, but did not enact, a provision that would have allowed the more general mixing of banking and commerce.

The real estate brokerage and management proposal is one of several initial proposals by the Board and the Treasury relating to the definition of activities that are financial in nature or incidental or complementary to financial activities under the GLB Act. The first of these proposals (which the Board recently finalized) related to acting as a so-called "finder." Finder activities, which generally are permissible for banks to conduct directly, involve putting buyers and sellers together in transactions negotiated by the buyers and sellers themselves. The second of these proposals involved defining three types of activities that the Congress determined as a general matter to be financial but required the Board to define more specifically--including safeguarding and transferring financial assets and facilitating financial transactions for third parties. The third proposal requested comment on whether the Board should determine that certain types of expanded data processing activities are complementary to financial activities.

With each of these proposals, the Board and, for the financial activity determinations, the Secretary of the Treasury are exploring a new standard for defining permissible activities. The GLB Act establishes certain factors that the Board and the Treasury must consider, but it otherwise leaves the agencies with significant discretion and very little guidance regarding what is and what is not a financial activity. …

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