Magazine article American Banker

Have You Forgotten about Tying? the Banking Agencies Have Not

Magazine article American Banker

Have You Forgotten about Tying? the Banking Agencies Have Not

Article excerpt

While Congress, the securities regulators and the New York attorney general have focused on the links between analyst research reports and investment banking business, Congress and the press have turned their attention on another "pay to play" issue: whether the pricing of credit is being manipulated by commercial banks to build market share in investment banking.

There is concern over the increased concentration among corporate lenders and over highly publicized examples of banks that dropped credit facilities when they were not granted sufficient investment banking business in exchange -- the illegal practice of tying.

A bank may not extend credit, lease, or sell property of any kind or furnish any service or fix or vary its consideration of a customer on the condition or requirement that the customer obtain some additional credit, property, or service from the bank (other than a loan, discount, deposit, or trust service -- traditional banking products) or from an affiliate of it. Nor can banks condition their services on a customer's not obtaining services from its competitors. Arguably, tying traditional banking products to one another is permissible.

Moreover, banks may not extend credit to a borrower at terms that are below-market or are not at arm's length where an affiliate, including an underwriting affiliate, is a participant in the transaction or where the loan's proceeds are used for the benefit of an affiliate. Therefore a bank may not offer credit at below-market rate as a "loss leader" to induce a prospective customer to use the bank's underwriting affiliate. During routine examinations, both the Federal Reserve and the Office of the Comptroller of the Currency are expected to evaluate a banking organization's compliance with the tying provisions.

Congress adopted anti-tying provisions because of what it perceived as the unique economic power of banks to extend credit. …

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