In response to the corporate scandals of recent years, government authorities have been dusting off the 1970 anti-tying provisions that prohibit banks from granting or pricing credit on the condition that the borrower obtains other products or services.
Prodded by their congressional overseers, federal regulators have been seeking to determine if some commercial banks violated the provisions by using corporate credit as a lever to gain securities underwriting business.
Giving banks the generally unrestricted ability to underwrite corporate debt and equity securities was central to the 1999 Gramm-Leach-Bliley Act, which was meant to reform and modernize the financial services industry. So when Rep. John Dingell of Michigan, the ranking minority member of the House Energy and Commerce Committee, last year asked regulators to determine if banks had violated the older anti-tying provisions when they entered this market under GLB, it dramatized an apparent conflict between these two landmark enactments, separated by a generation.
The essential purpose of GLB is to enable banks and other financial services firms to compete head on by allowing them to offer each other’s product lines. The concept raises important questions about the anti-tying provisions’ applicability in this newly liberalized market.
Congress should consider modifying the anti-tying provisions to reconcile them with the spirit and letter of GLB. In this regard, reforms enacted by New York in the 1980s to modernize the state’s usury laws may provide valuable guidance.
The gap in the federal laws can be better understood in terms of the congressional intent when the anti-tying provisions were enacted in an amendment to the Bank Holding Company Act of 1956. Congress was trying to prevent banks from using their perceived market power to coerce individuals or small or distressed businesses into buying unwanted products or services as a condition of getting credit.
In practice, however, the restrictions apply as readily to a bank lending $1 billion to a large corporation — clearly, barring distress, a transaction of relative equals — as they do to someone extending a credit line to the neighborhood auto-supply store. Before its fall Enron Corp. reportedly used various intimidation tactics to browbeat its bankers into extending credit.
Clearly, the banks’ coercive market power is not what it was thought to be 33 years ago, when the anti-tying provisions were drafted — at least not with respect to the corporate credit market, in which the banks must now compete with new entrants under GLB.
Moreover, since these new entrants — insurance companies, investment banks, and brokerages — generally are not subject to the BHCA’s provisions, including the anti-tying ones, the restrictions on the commercial banks put them at a real disadvantage.
It was just such a concern about eroding competitiveness that prompted New York to reform its usury laws 20 years ago. At that time it was apparent that banks there were losing corporate credit business to overseas lenders that were not constrained by the laws’ provisions intended to protect small and weak borrowers. To redress this competitive imbalance (among other reasons), the New York Legislature rewrote the laws to exempt loans of $2.5 million or more.
The same concept could be applied to bring the anti-tying provisions into closer harmony with GLB. The provisions might be modified so that a bank could make or participate in a loan of, say, $100 million or more, on the condition that the borrower appoint the bank as the underwriter for a securities issue (assuming proper credit principles and guidelines are applied).
It’s an interesting aside that the impetus for finally adopting Gramm-Leach-Bliley after years of fruitless debate was the growing recognition that yet another generation of American banking institutions was losing competitive ground to more nimble overseas competitors, which faced fewer regulatory constraints on lending and other activities.
It is assumed that should federal regulators determine that improper tying occurred, those responsible will face the consequences. If no such determination is made (and so far none has), the flap will fade away.
However, there will still be the important question this episode has raised: Shouldn’t Congress harmonize its banking laws to give the liberalized financial services marketplace it sought to establish with GLB every chance to succeed?
