Bank Oversight

With increasing cross-industry competition in financial services in the United States, market participants have raised concerns about the so-called "tying" provisions found in the Bank Holding Company Act Amendments of 1970. Those provisions prohibit a bank from engaging in tying practices or, in other words, requiring customers to obtain credit, property, or services as a condition of their obtaining credit or other desired products or services. The banking industry argues for the removal of the tying provisions, while some securities firms, insurers, and independent insurance agents have advocated retaining or strengthening them. This report provides information on the (1) evidence of tying abuses by banks and their affiliates and regulatory efforts to ensure compliance, (2) views of representatives of securities and insurance firms and independent insurance agents on tying provisions, and (3) views of representatives of banks and bank regulators on the tying provisions.

GAO noted that: (1) it found limited evidence of tying activity by banks; (2) Federal Reserve and OCC officials GAO interviewed were aware of only one violation identified during routine bank examinations or hold company inspections since 1990; (3) from January 1990 through September 1996, the Federal Reserve and OCC received and investigated 13 tying-related complaints, only 3 of which resulted in actions against the bank or holding company; (4) bank regulators' special investigation of seven large bank holding companies and four large banks in response to a 1992 tying complaint identified only one instance of tying that led to regulatory action; (5) GAO's interviews with state regulators, small business groups, and others identified little evidence of tying violations, although it was suggested that the limited evidence could be based, at least in part, on borrowers' reluctance to report violations for fear of jeopardizing their banking relationships; (6) those representatives of securities and insurance firms and independent insurance agents GAO contacted that expressed concern about tying advocated maintaining or strengthening the tying provisions as a way of offsetting the competitive advantages they believe banks enjoy; (7) some industry representatives and academic experts interviewed said that a more important consideration than the banking industry's share of the credit market is the availability of credit; (8) bank industry representatives viewed the tying provisions as impairing banks' ability to maximize the economic benefits they might otherwise obtain by offering complementary services; (9) some banking representatives also said that banks' evolving role as only one of many providers of credit makes them less able to coerce customers into accepting tied products or services; (10) with regard to banks' access to the discount window and federal deposit insurance, banking representatives pointed out that, with recent legislative changes, it is now easier for the Federal Reserve to lend directly to various financial firms with liquidity needs in a crisis, not just banks; (11) while the Federal Reserve chose not to take an official position on the need for the tying provisions, OCC cited the provisions' importance in making banks aware of their responsibilities to customers as they provide an increasing array of products and services; and (12) some regulatory staff expressed the belief that the tying provisions may have a deterrent effect, but others believed increased competition in the marketplace makes it difficult for banks to force a borrower into a tying arrangement.