Reform Law Leaves Some Doubters: Fed Oversight of Financial Holding Companies Is a Stumbling Block
Rehm, Barbara A., American Banker
The Gramm-Leach-Bliley Act has been in force for a year, and the question remains: Will it work?
Will companies adopt the financial holding company structure that the law created in order to offer banking, insurance, and securities under one corporate roof?
The new structure is not proving popular, but experts have blamed a host of unrelated factors. For example, many banks and securities firms had already merged via regulatory loopholes; relatively low stock prices during the past year discouraged deals; and continued consolidation within industry sectors pushed cross-industry mergers to the sidelines.
Of the dozens of people interviewed for this series, most still expect Gramm-Leach-Bliley to transform the financial services business.
The most common prediction: a wave of mergers between banks and insurers. "The first year is not really an indication of things to come," said Steve Blumenthal, a public policy analyst at Schwab Capital Markets. "Everyone is still warming up their engines."
Whether Gramm-Leach-Bliley -- a year old come Sunday -- ultimately succeeds will depend on how tightly the Federal Reserve Board supervises financial holding companies.
"In principle, this could be the framework to allow us to go ahead for the next 50 years," said Randall S. Kroszner, professor of economics at the Graduate School of Business of the University of Chicago. "It just depends on how the regulators implement it."
SO FAR, NOT SO GOOD
If the Fed's take on merchant banking is any indication, Gramm-Leach-Bliley's legacy is in trouble.
The Fed quickly tarnished what had been considered the new law's crown jewels by proposing expensive capital rules for merchant banking. In March, the Fed, which oversees financial holding companies, said it wanted every $1 invested to be backed with 50 cents of capital. Merchant banking powers -- allowing investments in nonfinancial companies -- were intended to make Gramm-Leach-Bliley a two-way street for securities firms. Brokers were supposed to be able to buy banks without being forced to divest such investments.
Yet the securities firm that pushed the hardest for Gramm-Leach-Bliley -- Merrill Lynch & Co. -- has not become a financial holding company. Merrill, which operates two limited-purpose banks, is not interested in discussing its reasons. Repeated requests for interviews finally prompted this statement: "Merrill Lynch supported legislation to modernize the financial services industry and believes the legislation that passed was in the best interest of the industry and its clients. As a matter of policy, we do not comment on our internal plans."
But there is no doubt that the Fed's merchant banking plan -- and other, broader supervisory moves -- has cooled nonbanks' interest in becoming financial holding companies.
Here's how a senior insurance company executive reacted to the merchant banking rules: "When we saw those, we said, 'This is the new Fed? This is the umbrella supervisor?' No thanks."
WHAT'S NOT TO LIKE?
Many brokers also turned down the chance to discuss on the record the prospect of Fed oversight, but their man in Washington -- Marc Lackritz, president of the Securities Industry Association -- agreed that rigid banking regulation makes his members uncomfortable.
"People in the securities business have a different regulatory culture," he said. "As a result, they will think long and hard before changing that.
"Besides, they can do a lot of the things they need to do without becoming financial holding companies."
However, Mr. Lackritz said it was important to his industry that it gained the option to buy banks. And when it makes sense for their customers, securities firms will use it, he said. "Schwab bought U.S. Trust for a specific reason; they knew what they wanted for their customers," he said. "Most securities firms don't think of banking per se as being a great business. …