-
Deregulation and Its Effects
On the Financial Services Industry
An Honors Thesis (ID 499)
by
Sheila M. Kelty
Thesis Director
John Fitzgerald
Ball State University
Muncie, Indiana
July 8 t
1988
Expected Date of Graduation
First Summer Session 1988
j
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Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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Glass-Steagall Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Institutions Regulatory Act . . . . . . . . . . . . . 3
Depository Institutions Deregulation Act .•. . . . . . . . . 6
Garn-St. Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Competitive Equality Banking Act . . . . . . . . . . . . . . . . . 12
Insurance Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Banking and Securities Industry . . . . . . . . . . . . . . . . . . 20
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:'
1
Until
years
few
a
ago,
financial
markets
the 1930's.
country were ruled by laws and regulations from
These rules
were imposed
devastating
loss
depression
the
of
to protect investors from another
they
those
late
incurred
1920's.
their time,
relevant for
economy and
like
The
but changes
during
regulations
in all
led
specialization of institutions.
further
separate
securities,
roles
and
specialized structure
and
regulators
insurance
With few
to
of regulation
Lawmakers
banking, thrift,
industries, and competition was
expected to take place within these
them.
were
market had produced a need for deregulation and
"The
gave
the
areas of the
new legislation.
to
in this
industries, not between
exceptions, the regulator for one industry
had no authority over firms in another.
Federally chartered
savings associations
have one deposit insurer; banks have a
different
securities
one;
and
protection altogether.
each firm
years,
was content
the
regulators
This
plan was
with its
could
aggressive entrepreneurs who
firms
another
kind
of
adequate as long as
assigned niche.
For many
keep
the
sometimes
pace
with
attempted
few
to break
out of this rigid structure."!
To
understand
first understand
the
purpose
the reason
of deregulation, one must
for regulation
and the events
2
leading
up
to
it.
In
the
1860's
banks
began
nationally chartered and by the early 1900's had
to be
become the
largest financial institutions ever formed.
A committee was
formed
of
to
investigate
deposits and
the
concentration
investments) among these banks.
money (both
The committee
decided that the two areas of banking should be separate, so
they produced
the Federal
made it illegal for
corporate
either
depository
securities.
legislation
bypass this
investment
depression and
thousands of
Reserve Act
institutions
The
banks
by
owning
companies
stock
of 1913.
market
or
found
to underwrite
that they could
affiliates
trust
crash
of
This Act
which were
companies.
the
The
1920's caused
banks to fail, due to the conflict of interest
between depository institutions and securities firms.
Glass-Steagall Act
These failures caused pressure on the
something
to
protect
about the Banking Act
Glass-Steagall
the
people.
of 1933,
Act,which
This pressure brought
also known
established
government to do
in part
as the
the
Federal Deposit
Insurance Corporation. The FDIC was started
with funds from
the U.S. Treasury which were later replaced by premiums from
the member banks.
Nearly every
it gave
security that
them the
The formation of the FDIC
helped
bank joined
the FDIC since
their depositors demanded.
the
government
to start
regulating the banks, due to the need to examine records for
insurance purposes.
The
main
provision
of
the Glass-
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3
however,
Steagall Act,
The
investment banking.
are
low
Act prohibited
Treasury
risk
securities were
instruments.
allowed banks
to
purchase
customers' accounts.
investment
prohibited
from
provision of
and
sell
affiliated with
firms.
accepting
securities,
for the
twenty of the Act prohibited
or being
banking
allowed since they
1935 amendment to the Act
A
Section
member banks form owning
all
national and state
from purchasing equity securities for their
chartered banks
own account.
the separation of commercial and
is
Securities
demand
deposits.
any and
firms
were
One
other
the Act prohibited interest payments on demand
The reason for this was to curb competition among
deposits.
banks since
this type
of competition
was one of the major
factors of bank failures during the depression.
Financial Institutions Regulatory Act
Another Act in which
the
Financial
Congress
Institutions
House of Representatives
regulated
Regulatory
Committee
on
Act
finances was
of 1978.
Banking
The
stated the
reasons for the legislation as being "Financial institutions
provide the lifeblood
for laws
system is
to assure
obvious.
for
communities ... the
public's need
a safe, sound, and responsive financial
When these
bank services
are lost or
diminished ... the impact on the community can be severe."
The
first
provision
of
this Act is to limit insider
transactions. According to an FDIC bank failure study almost
4
sixty percent
of the
bank failures
1975 were principally
provision limited
caused
by
all executive
during the years 1960-
officers and stockholders,
with ten percent of more of the outstanding
of
loans
no
than
more
This new
loans.
insider
stock, to total
ten percent of the bank's capital
accounts. All insured banks were also prohibited from paying
overdrafts on
accounts belonging
of overdrafts is considered an extension
disallowed.
They did
funds in the case
been
written
attempt
to
overdraft, but
preauthorization
required that
of credit
and was
allow the banks to make transfers of
of an
further
The payment
to insiders.
regulate
all loans
from
must gain approval by the board
there had
insider.
In an
transaction
it was
the
insider
to insiders
only if
that exceeded $25,000
of directors
during a time
in which the insider is absent from the meeting.
The only problem with all the regulation was that there
was no way to enforce it.
supervisory
powers
to
The
keep
committee then
the
monetary penalty could be imposed
first offenses.
laws
enforced.
for minor
A civil
violations or
The assessment of such a penalty would take
into account the severity of the infraction and
of the
set up four
violator to
issued against the
pay.
the ability
A cease-and -desist order may be
institution
or
institution who broke the regulation.
the
officer(s)
of the
The third alternative
is the removal or suspension of insiders who
have evidenced
personal dishonesty or demonstrated a willful and continuing
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5
disregard for the safety
fourth
The
punishment.
people,
is
power
a
preventiye
that
This required
who would
vote 25 percent or more of
the
appropriate
days
sixty
request
it
if
or concert of
to acquire
stock,
must
to
prior
The agency may
transfer of the stock.
acquisition
measure rather than a
any person
be attempting
agency
of the institution.
and soundness
would
the power to
apply
the purchase or
approve of
be
to the
a
deny the
threat
to
the
institution or its depositors.
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The
next
section
of
agencies
that
control
financial
areas
dealt
with
institutions
relations,
interest
were
FIRA
NCVA
section
of
regulatory
The four
interest, financial
council,
improving
restructuring.
prohibited
the
institutions.
conflicts
examination
and
improved
The
employment
agency
conflicts
In
a
of
regulated
institution for a period of two years for and person who did
not
complete
a
term
regulatory agency.
of
the
FDIC,
for
which
he
was
appointed
This would include members of
governors
of
the
Federal
National
Credit
Union
Association
and members of
board.
official of these agencies may not appear before
for
which
he
worked,
Next, the Financial
created
to
examination
on
of
federally
A
former
the agency
behalf of any agency or person.
Institutions
prescribe
the board
Reserve System,
members of the Federal Home Loan Bank Board,
the
in a
Examinations
principles
chartered
and
Council was
standards
for
institutions.
The
6
improvement
of
agency
regulations
required
insure that
agency to review their regulations to
and purpose
for each
each banking
the need
The NCUA was restructured
was clear.
to have three members on the board rather than one.
The changes
provided new
to
to
insurance.
authority
regulations for
insurance.
allowed
bank
of
Until
sell
all
for
financial institutions
holding companies with regard
1970
bank
holding
types
of
property
companies were
and
liability
An amendment in 1970 changed this to read that a
holding
company
insurance directly
changed the
could
sell
related to
only
those
the banking
regulation even further,
types
business.
of
FIRA
to state that it would
not be permissible for a BHC
to
principle, agent,
except for the five categories
of exemption.
or broker
provide
These exemptions include
disability and
insurance
as
a
credit life, credit
mortgage redemption; a BHC in a community of
less than five thousand
residents; grand fathered
BHC which
can continue the activities which were legal for them at the
time of the new legislation; and
BHC with
aggregate assets
of less than $50 million.
DIDMCA of 1980
These
two
Acts
all banking acts up
The
first
attempt
have been regulatory legislations and
to this
at
point were
deregulation
of the
was
the
Institutions Deregulation and Monetary Control Act
same type.
Depository
of 1980.
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7
The
monetary
control
portion
to
depository institutions
if
even
Reserve,
of
keep
this
the Federal
is not a member of the
The reserves
Federal Reserve System.
at
reserves
institution
the
requires all
Act
are to
be figures as
three percent of the total of all transaction accounts up to
$25,000,000.
Any amount
of
the
shall be
exceeding $25,000,000
total
privileges
as
member
for
same
member
as
well
the same
discount and
Fees charged for
banks.
services such as check clearing and
the
these accounts
reserved at twelve percent.
All institutions will be entitled to
borrowing
of
wire transfers
as
monetary control essentially gives
will be
This
nonmember banks.
no
extra
privileges or
rights to members of the system.
Title
of
II
the
Act
states that "limitations on
payable
saving
on
deposits
money ... and
providing an
and all depositors,
savings, are
not
which are
achieved
their
purpose
of
of funds for home mortgage lending;
in
particular
those
For this reason, the Congress
orderly phase-out
the maximum rates which
phase-out will
with modest
can
be
paid
on
deposits.
occur over a six year period.
in
rates
has provided
and elimination of limitations on
calls for the assessment of
differential
rates
entitled to receive a market rate of return on
their savings."
for an
interest
Section 202
accounts discourage persons from
have
and
deregulation.
the
and
even flow
is
whether
between
banks
the
and
This
Title I I also
removal
thrifts
of the
will
8
adversely affect the viability of the thrift industry.
Title III is the Consumer Checking
which
allows
for
the
withdrawal
of
automatically from a savings account
bank itself
Account Equity Act,
funds
to
a
to
be
payment
made
to the
or to a demand deposit account as long as there
is written authorization from
the
depositor.
This title
also allows for banks to have Negotiable Order of Withdrawal
accounts
in
which
the
interest
or
dividends
institution
on
the
os
entitled
to
pay
money in the account.
One
other section in this title is the amendment of the
protect
depositors
for
$100,000
instead
FDIC to
of the previous
limit of $40,000.
Powers of Thrift Institutions is Title IV.
lists and
describes all
that oan be dealt by
extension
of
credit
the types of loans and investments
thrifts.
in
Section 401
Credit
connection
card
issuance and
with
credit cards is
the
main purpose of
allowed by section 402 of this title.
Truth in Lending simplification
Title V.
The
first section
lS
deals with
the disclosure of
fees,rates, and other charges used in computing the payments
on loans.
An
amendment to the Truth in Lending Act allows
sixty days for errors
to be
discovered.
During this time
adjustments may be made to the appropriate account to assure
that the person will
excess
of
the
lower.
Section 617
not be
charges
required to
actually
amends the
pay an
disclosed,
liability of
amount in
whichever is
a credit card
9
If a credit card is used by an
holder for unauthorized use.
to ,
but not
exceeding fifty
dollars as
the
issuer has been notified that
card
for up
long as the card
has
been
lost of
The card issuer is liable to inform the cardholder
stolen.
of the action to be taken in the
card.
be liable
person, the cardholder will
unauthorized
Section 621 amends
case of
or lost
the treatment of credit balances
Any time
in excess of one dollar.
a stolen
there is
such a balance
it is the creditor's responsibility to credit the customer's
account and to offer to refund the amount
the customer.
If
stays
the amount
of the
as a
credit to
credit for six
months or longer it is the creditor's responsibility to make
a
good
faith
effort
customer through his
number.
to
refund the amount by tracing the
last
Oral inquiries
known
as to
address
and/or telephone
the cost of credit shall be
disclosed as to the amendments in Section 623.
This section
states that all such inquiries shall be answered in terms of
annual percentage rate, no matter how the rates are figured.
The only
exception to this is open ended accounts which may
be answered in terms of periodic rates as long as the annual
percentage rate is also disclosed.
Garn-St. Germain
The
next
deregulation
act
is
Depository Institutions Act of 1982.
deregulate
the
financial
world.
the
Garn-St. Germain
This Act
Title
did much to
I is Depository
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10
Insurance Flexibility which expanded the forms
assistance that
could be provided by the insurance agencies
and broadens the circumstances
can
be
granted.
The
new
such assistance
under which
provision
for the agencies to
follow for
mergers of
failing and failed institutions.
done only with written permission from
the
extraordinary
specific
provides
procedures
through
of financial
acquisitions or
This
shall be
the state supervisor
acquisitions
authority.
This
permission must be given at least forty-eight hours prior to
the start
of any
such action.
The mergers shall be given
priority in the following order;
-
between institutions
the same state,
2. between institutions
different states,
3 . between institutions
the same state,
l. between institutions
different states.
of the same type within
1.
These
guidelines shall
absorption
or
merger
of the same type in
of different types within
of different types In
be
followed
of
failed
in
or
the
case
failing
of any
depository
institutions.
Title II concerns net worth certificates.
new
type
of
certificates
capital assistance
suffered
capital
depository
losses
lending activities.
with promissory
to
which
These
as
a
will
These
be used to provide
institutions
result
certificates
notes,by institutions
are a
of
may
with a
which have
their mortgage
be purchased,
net worth of
11
up to
three
percent
assistance the
of
total
net worth
To
assets.
must be
equal to or greater than
one-half of one percent of the assets after
the
insurance
Federal
certificates.
require merger resolutions from
long as
assistance as
have
a
positive
net
Management changes
the issuance of
agencies
can
not
institutions receiving this
the said institution is projected to
for
worth
at
six
least
months.
can not be required if the projected net
worth is positive for at least nine months.
be figured
assistance shall
qualify for
The
amount of
according to the percentage of
net worth.
An institution with three percent net worth will
receive up
to fifty percent of the lost amount, whereas one
with one
percent
percent
of
the
net
lost
institution has net
prohibited form
worth
will
amount.
worth
receive
During
certificates
paying dividends
up
the
to seventy
time that an
outstanding
on common
stock.
it is
In the
event of a liquidation, the certificates will be of a higher
priority than common stock.
The
thrift
restructuring
of
Title
III provides for
increased investment powers of
federal thrift institutions.
The
widen
purpose
of
this
is
to
the range of services
thrifts can provide to generate earnings.
granted the
They
are
power to offer stock rather than mutual shares.
also
commercial and
the
Thrifts have been
Depository
allowed
to
accept
corporate customers.
Institutions
demand
deposits
from
This Act also directs
Deregulation
Committee
to
12
establish
a
bill
for
establishment of accounts which are
directly equivalent to
These
mutual funds.
and
accounts shall
transfers and three third
legal minimum
competitive
with
allow three automatic
party transfers
balance requirement
money market
per month.
shall be
The
no higher than
$5,000.
Title V outlines provisions
member
banks.
Lending
relating
limits
were
to
national and
raised
from ten to
fifteen percent of the banks unimpaired capital and surplus.
The
title
also
requirements
deposits of
for
provides
those
two million
an
exemption
institutions
with
dollars or less.
title the statutory limitations
on
from
loans
reserve
total
demand
Also, under this
to
insiders was
eliminated.
Other provisions
of the Garn-St. Germain Act allow for
NOW accounts to be offered to
Banks are
limited to
state and
loans to
than ten percent of capital stock
local governments.
one affiliate to be no more
and surplus
and loans to
all affiliates shall be no more than twenty percent.
Competitive Equality Banking Act
One
of
the
most
recent
Competitive Equality Banking Act
this
legislation
according
Acts
in
of 1987.
finance
The
is
the
purpose of
to the Senate report,
is to
halt the aggressive exploitation of loopholes in the banking
laws
and
to
recapitalize
the
Federal
Savings
and Loan
.-
13
The nonbank bank
Insurance Corporation.
the exploitation
Holding
Company
Act
chartered as a bank
amendment
accepts
a
bank
this
to
In
changed.
was
under the
changed
defined
as
national bank
include
any
1956 Bank
the
any entity
A 1966
act.
institution that
In 1970 it was changed to any institution
accepts deposits.
which
This was accomplished when
of loopholes.
the definition of a bank was
was formed through
demand
This definition was
deposits and makes commercial loans.
supposed
Some
trust companies.
to
differentiate
banks from
institutions found a way around the
Bank Holding Company Act by either giving up demand deposits
or
commercial
loans
so
they
would
By doing this,
classified as a bank.
not have
that
no
longer
the nonbank
be
bank did
to follow interstate branching regulations and was
exempt from the requirement
that the
activities of
a bank
holding company must be closely related to banking. Thus, by
becoming a nonbank bank the institution could be
parent in
any industry.
Congress changed
In
order to
the definition
of a
owned by a
close the loophole,
bank to
be any bank
whose deposits
are insured by the FDIC as well as those who
accept
deposits
demand
depositor may
from
branches in
companies
any
deposits
in
which
the
withdraw payments to third parties and engage
in the business
excludes
or
of
the
making
definition
the U.S.;
that
act
commercial
any FSLIC
solely
any
loans.
foreign
This bill
bank
with no
thrift institution; trust
as fiduciaries; credit unions;
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14
credit card banks;
Any
companies.
loan companies;
industrial
nonbank
bank formed before March 5, 1987
will be grandfathered from compliance with
Company Act
forth in
a
control of
more than
parent
Equality Act.
company
of
additional banks
five percent
or thrift.
of the
will be
control the nonbank so
a
This legislation
and from acquiring
shares or assets
may
be
allowed.
that its
set
nonbank from obtaining
or thrifts
No new activities
joint marketing
the Bank Holding
the new legislation
as long as it follows
this Competitive
prohibits
and Edge Act
allowed
of a bank
and
no new
The parent company must
assets do
not increase by
more than seven percent per year.
The
second
part
of
this
moratorium on certain nonbanking
Act of
1933
legislation
activities.
imposes
a
The Banking
prohibits banks from being affiliated with any
institution principally engaged in issuing, underwriting, or
distributing
however,
have
authority
to
securities.
applied
Several bank holding companies,
to
underwrite
the
and
Federal
Reserve
for
sell securities in a nonbank
subsidiary by claiming that the sale of securities
be the
principal engagement
the Federal Reserve and
the legality
of this
of the
shall be
no approval
will not
subsidiaries.
Congress enough
time to
To give
look into
matter, a moratorium has been set for
one year beginning March 6, 1987.
-
the
of any
During
this time
such applications.
there
The bill
also bars Federal banking agencies from issuing any rules to
15
increase the insurance powers of banks during the moratorium
This was done to give Congress time to consider the
period.
issue
of
whether
residents or less
a
national
can
bank in a community of 5000
insurance
sell
nationwide
or only
locally in the place in which it is located.
The
next
part
important
This is
losses in
of
the Act is FSLIC recapitalization.
because
of
substantial
amount of
The regulations in this title
1986.
thrifts in
the
give guidelines for borrowing
billion problems in thrifts.
to
help resolve
the $20-$25
The framework considers a plan
made by the Federal Home Loan
Bank Board
and the Treasury.
It requires that the FSLIC provides to Congress a variety of
reports
to
explain
resolutions.
permit
It
any
its
also
accounting
generally accepted
financial
requires
that
is
position
that
not
and
its
the FHLBB must not
consistent
with the
accounting principles and it must not be
more strict than the GAAP when writing down reserves against
problem assets.
The use of stringency in the past has been
one of the causes of thrift failure.
Title IV
the Act
concerns emergency
contends that
acquisitions and mergers.
if acquisitions
are made during the
failing stages rather than waiting until
occurs, that
chances of
finding a
Bridge banks, those operated
should
be
established
only
buyer will be improved.
by the
if
the actual failure
it
FDIC for
less
liquidation or in the public's best interes'
three years,
expensive
r
than
-
16
Federal Credit
Title
The
V.
remove credit
Union Act
Amendments are
clarification
of
the NCUA's authority to
from the
union employees
the topic of
office is explored
This authority is extended to any person formally or
here.
informally associated with the
position to
do harm
will
also
be
suspended
is in a
If the said person is removed
to it.
the affairs of an insured
from conducting
, who
credit union
from
dealing
credit union, he
with all federally
insured credit unions, depository institutions, bank holding
companies,
and
institutions
Administration
unless
he
chartered
by the Farm Credit
allm.,red
is
back
in
by
the
appropriate federal regulatory agency. This title also deals
with the
and
NCUAs discretion
second
years.
mortgages
for
This will permit
to allow
home improvement loans
periods
of longer than fifteen
credit
unions
to
be competitive
with other financial institutions.
The
final
provision
of
Availability
Act.
The
institutions
to
disclose
first
depositor's funds.
The
adopt
regulation
an
interim
clearing system.
this Act is the Fair Deposit
part
their
Federal
requires
policy
Reserve
is
depository
on
delaying
instructed to
based on improving the check
This shall have a tiered
schedule with an
outside limit of six days for fund availability on out-oftown checks.
Also,
within the
final regulation must be
tiered schedule
next thirty-six
adopted which
will have
months
a
the same
, but with an outside limit of four days on
-
17
out-of-town
It
checks.
shall
provide
also
one
day
availability for U.S., state, and local government checks.
legislations and laws discussed thus far give
The five
the basis
United
regulation and
of financial
There
States.
has been much controversy over the
Financial institutions want
main provisions of these laws.
to
have
the
authority
to
while insurance companies
sell securities and insurance,
do
not
want
banks, yet want to sell securities.
does not want to
would
like
to
others
possess
deregulation in the
to
from
The securities industry
securities,
sell
some
competition
however, it
of the powers of banks.
The
regulations to keep these industries separate were made with
key aspects
of competition
in mind.
The industries do not
feel as though they are being treated fairly.
must be
looked at
Each industry
individually to see what it has, what it
wants, and how it has changed.
The Insurance Industry
The insurance industry has
what products
are sold
companies are offering
offered by
banks or
these include consumer
services,
cash
companies now
holding
and who
many
hold a
companies.
2
can sell
products
in two ways;
them.
only be
securities firms in the past.
Some of
financing,
very
mutual
funds, brokerage
and commercial mortgages.
important,
larger portion
One
that
Insurance
could
management,
commercial mortgage is
been affected
of
the
in
that insurance
of them
other
The
big
than do bank
areas
is
18
investment
brokerage firms
generate
and
millions
using
of
cross-selling
banks
business
and
a
at
The
3
firms
securities
surprising
between
them to
One
next major area
Life insurance companies as
is personal financial planning.
as
acquiring
in investment capital.
dollars
such combination is Prudential-Bache.
well
are
firms
Insurance
banking.
are
One
rate.
entering
thing
this
insurance
companies must remember when selling this service is to keep
the sales
insurance separate from the advising
function of
function of financial planning.
customer
will
be
driven
If
away,
this 1S
sue
personal financial planning is just
insurance.
Deficit Reduction
of insurance companies have
The
Act
more
belief that
way
to sell
an insured.
payable
5
Act of 1984, the products
become important
redefined
company money that is
death of
one
his
the
4
Since the
vehicles.
to
not done,
insurance
to
a
as investment
to be insurance
beneficiary
upon the
This means that the insurance company
owns the money until it is
paid
out.
If
a policyholder
keeps a policy in force until his death he will not have had
to
pay
1ncome
tax
on
the
because it was not his money.
the money
additional
When the beneficiary receives
upon the death of the
be taxed as income.
6
investment income
In this way,
insured it
still will not
insurance as an investment
has a distinct advantage over other investment vehicles.
Universal life policies also
have
advantages
for the
19
investor, but they are advantageous to the insurance company
too.
In this policy the insurance company guarantees
of income
for one
year.
This rate is usually higher than
After the one
market rates.
a rate
year
period
the
rate
is no
longer guaranteed, but the investor will generally leave his
money invested anyway.
invest the
higher
money for
rate
of
This allows the insurance company to
longer than
return.
disintermediation that
the past.
7
This
is
one year,
This
has affected
not
the
thus earning a
helps
reduce
insurance companies in
only
benefit
universal life
policies offer, they also allow for movement of funds.
movement is generally among
the
different policy
This
accounts with
differing rates of return.
Another
type
of
whole life policy.
investment
insurance
policy is the
This policy provides income in two ways,
one is a guaranteed cash value and the other is dividends.
These dividends
are not taxed because they are labeled as a
reimbursement of excess premiums that have been paid in.
B
The change in who is allowed to offer insurance has not
been as
big as
the change in products offered.
require a person to be licensed to sell
In
fifteen
states,
bank
employees
insurance products.
are
selling insurance even with a license.
to
have
some
of
their
employees
capitalize on annuity income.
significant
fees
income,
All states
prohibited
Banks
licensed
Annuities
from
are beginning
in
order to
provide banks with
protection from losing customers
-
20
upon
maturity
of
and
CDs,
add
greater
appeal
for new
customers.
Banks offer two types of insurance policies;
Individual
and group.
company
and
the
policies are
between the insurance
Group policies are
individual.
insured
individual
between the insurance company and the financial institution,
in
which
return
issues
Coverages and
insured.
cancellation.
benefits are
Products
mortgage
insurance,
to
certificates
offered
the
individual
comparable except for
include
mortgage
life
insurance,accidental
disability
disability insurance, accidental death insurance, and credit
life insurance.
9
New competition in
the
insurance
intensify the
efforts of
the companies
market shares.
This will
companies have
strong networks
not
relationships with customers.
result
only
consumers.
in
better
be
industry
will only
to hold onto their
difficult
because these
of agents who have built up
The new
services
competition may well
and
coverages
for
the
to
Banking and Securities
The effect competition has
to the insurance industry.
also
affected
by
industries
together.
is
highly
and hard
The
is not limited
Banking and securities firms are
competition.
becoming intertwined
discussed
on services
These
two
to separate
competition
regulated.
industries are
so they will be
facing
these
two
Banks are regulated to
-
21
benefit the
depositors and
assure that
protected.
This protection
their deposits are
helps in case of a liquidation
to ensure that depositors fare well.
shareholders and
The
In Harmsen vs.
officers, however, usually tend to lose out.
Smith it
with
was decided
that banks
The
regulation.
are examined
to help out
examination may provide incidental
benefit to the bank but it
was
not
done
solely
for that
The examination does not create an actionable duty
purpose.
Franklin vs. U.S. government
to the bank.
adds to
this by
finding that the government does not guarantee bank solvency
and can not be
This means
in the
held liable
government is
that the
however, the FDIC (a government
depositors.
an insolvency.
not liable to the bank,
agency)
is
liable
to the
11
Hans Angermuller
of Citicorp has a different reason as
to why the industry is regulated.
of
case of
regulation
is
He says that the function
facilitate
to
sources through intermediaries to
protects them
from loss.
through
flow
users
in
of funds from
a
manner that
Mr. Angermuller has a set of four
techniques to help accomplish this.
competition
the
limits
First, avoid excessive
placed on interest rates paid,
nature and scope of
activities, geographic
operating area,
and entry
business.
The second
technique is to
nature
portfolios.
into the
limit the type
against
the
and
misconduct
of
Next, insure
of insiders by prohibiting certain
activities and penalizing any deviation.
The last
step is
22
to provide
government financial
support.
12
If these steps
regulation would
be efficient
and helpful to
are followed
the industries and the public.
Regulation of
to want
these industries
This deregulation
deregulation.
areas; deposit
not been
separation
focuses on three
interest rate control, geographic expansion,
and the separation
These have
has caused the players
investment
of
and
commercial banking.
come a long way since the initial lobby but have
completely and
of
commercial
freely deregulated.
and
Actually the
investment banking has been
more regulated since the industries have
started to combine
products.
Although
deregulation, the
Congress
has
bills they
called
pass have
their
actions
more regulation in
them than they take out. For example the Deregulation Act of
1979 deregulated a few areas but also had six areas in which
it
either
tightened
existing
control
or added new ones.
These include:
1. Kept the prohibition of interest payments on
demand deposits.
2. Authorized the revocation of national bank and
trust powers by order of the Comptroller of the
Currency.
3. Kept the requirement of bank directors to own
qualifying shares of stock.
4. Restricted bank holding companies abilities to
own trust subsidiaries in different states.
5. Authorized the Comptroller of the Currency to
issue new regulations on
those practices he
believed to be unsafe or unsound.
6.
Imposed a
moratorium on United States banks
being acquired by foreigners. 13
These are not exactly what the
industries were
looking for
-
23
when they lobbied for deregulation and reform.
Another example is the Competitive Equality Banking Act
This
of 1987.
Act caused
in the thrift
dramatic changes
It closed
industry but did little to help commercial banks.
the nonbank bank loophole, but that was not
to the
of much concern
competitive forces pressuring commercial banks.
moratorium
on
powers works
new
insurance,
against the
and security
estate,
real
of achieving
banks goals
will try
not to
extend the
moratorium past its
It will be
expiration date, but they will probably have to.
-
impossible
for
them
to
pass
a
comprehensive
legislation during an election year.
that
comprehensive
banking
insurance, and real estate
regulatory
overlapping
industries.
as
structures
bank
well
of
matter which
viewpoint one
help
uses.
and
hurt
enter
competition.
prices will
as
each
fixing the
of
these
into
new
competition no
The banks feel like they
are being helped when competition is limited,
to
securities,
14
These regulations both
want
banking
The reason for this is
involves
powers
a full
Congress said
role in the financial services market place.
that they
The
but
fields which will increase their
The public wants more competition so
decrease and
they also
that the
service, as well as quality, will
increase.
-
Eric Compton of the
three type
of bank
Chase
competition in
Manhattan
Bank clarifies
his newest book.
These
-
24
are
types
companies.
credit
nonbank
unions,
nonbank
Credit unions are owned by members who purchase
shares through depositing money
These
savings accounts.
in share
members must
such as having the same employer
same
and
banks,
in
living
religion,
be of a common bond
having the
or profession,
the
belonging to the same social
draft accounts or
same
or
geographic
group.
fraternal
area
or
Credit
unions offer a broad range of financial services, pay higher
rates on deposits and
charge lower
They
commercial banks.
do not
pose much
of a
they are mainly local
public.
loans than do
are exempt from federal income tax
Despite
on their net earnings.
rates on
all these
threat to
entities
advantages, they
commercial banks because
and
are
not
open
to the
The next type of competition, the nonbank bank, was
discussed earlier on pages 12 and 13.
longer
legal,
except
under
These entities are no
the grandfather clause of the
Competitive Equality Banking Act of 1987.
The final type
poses
a
major
companies are
of
threat
divided
competition
for
into
is
commercial
five
the
strongest and
banks.
Nonbank
subcategories: financial
conglomerates, industrial companies with financial services,
brokerage
firms,
insurance
These subcategories
companies,
and
retailers.
are slightly different from one another
and many firms are hard to place in just one area.
-
1s
To find
out how this is possible each subcategory must be studied.
Financial
conglomerates
are
conglomerates
which
-
25
specialize in the
Shearson
Express,
industry,
services
financial
American
Lehman Brothers, Beneficial Corporation,
and Household Finance Corporation are a few examples of this
type of
firm.
but
provide
do
The companies do not accept demand deposits
facilities.
credit
transfers, credit
cards,
They
offer
money
insurance coverages, mutual funds,
CDs, mortgage loans, IRAs, or college savings programs. 16
Some financial
conglomerates
industrial companies
An industrial
company
is
and
product financing
such as
also have commercial
a
IBM.
that
These
also
credit
has some
offer consumer
auto loans.
insurance;
improvement ,personal ,
as mortgage
one
firms
GMAC offering
insurance;home
least
company
lending;
equity loans; as well
at
classified as
Examples include Ford, General Motors,
Gulf and Western,
have
be
with financial services or vice versa.
financial services.
disability
could
financial
Insurance Company, Mortgage
auto and
and
lending services.
subsidiary
Insurance
They
home
Most
such as Puritan
Company,
or Kidder,
Peabody and Company (a brokerage firm).17
Kidder, Peabody fits in industrial companies because it
is a subsidiary, however it could
broker category.
1975
made
The
brokers
fit just
as well
in the
removal of fixed rate commissions in
look
elsewhere
for
a
money
making
strategy.
This brought
are today.
These hybrid brokers combine groups of financial
services
and
market
about the hybrid that most brokers
them
nationally.
Two examples are
-
26
and the
Merrill Lynch
brokerage
offers
mortgage,
services,
estate,
real
insurance,
underwriting,
securities
Eurobond,
management and
Merrill Lynch
Dreyfus Corporation.
money
commercial paper services, as well as a cash
management account
which
will
be
discussed
later.
The
Dreyfus Corporation was the first brokerage firm to actually
enter banking.
divested
They acquired
its
the
loan
commercial
Lincoln
State
portfolio
so they would no
longer be considered a bank holding company.
IS
The final competition facing banks today
Retailers
ways.
entered
the
financial
in their
were K-Mart and
Kroger.
services
financial
stores.
was
including J
and
First
or minibranches of
Two retailers
The
by
financing and credit cards.
is retailers.
services industry in two
The first is through placing ATMs
local banks
other
way
offering
C
J
Bank and
who did this
retailers enter
consumers
Penney
product
has subsidiaries
C Penney Financial Services, J C Penney Realty,
National
Bank.
It
offers
consumer
product
financing, credit cards, personal, mortgage, and auto loans.
Sears is
trying
to
financial services
become
industry.
the
It has
well as a proprietary
card,
advances,
insurance,
Allstate
largest
check
retailer
in the
its own bank card as
cashing
services, cash
Dean
Witter
each
type
investment
banking, and Coldwell Banker realty.
All
of
the
competitors
in
of
described have advantages over the commercial bank.
industry
Most of
27
these advantages
came
about
through
Eric
regulation.
Compton described five distinct advantages he believes these
firms possess.
1. They can operate across state lines and branch
within states.
They are not subject to the
McFadden Act which restricts banks
from doing
this.
2.
They do not have to keep deposits at the
Federal Reserve and can use this extra money
however they wish.
3.
They are not regulated as banks, thus are
limited only to whatever financial services they
can create or resource with their available funds.
4. They are not tied to long term, low-yield loans
to other countries which require them to hold loan
loss reserves.
5. They have an advantage from their start due to
files
on their existing retail or industrial
customers, these can be used for cross-selling. 20
Because
of
these
advantages
competition, all firms in
must continually
financial
the
create new
and the ever increasing
products.
services industry
These products are
consumer based rather than commercial based.
this
is
that
consumers
have ever had before.
this
money
deposits.
the
such
have more liquid assets than they
They are looking for places to invest
as
money
market
funds,
and
demand
They also have more debt than ever before, due to
deregulation
of
debt
started charging more for
as monthly
The reason for
fees for
income ratios.
their services
21
Banks have
and products such
checking and required minimum balances
in customer's accounts.
variable rate
to
Thrifts
have
started
offering
mortgages which allow them to change the rate
-
28
changes
the
in
money
flexibility.
Thrifts
owners
rather
stocks
industry
has
come
them to
This helps
of interest on the loan.
have
than
up
which
rates,
market
also
keep up with
gives
them
started
offering their
mutual shares.
The securities
with
some
new
too. The
products
Intermarket Trading System allows orders to be placed in any
exchange and them matched with the
best available
price in
any other exchange that trades that same security.
Other
new
security
financial units.
invested
commercial
brokerage
companies, and
competition,
banks
are
combinations
Individual Retirement
The
at
ln
products
banks,
firms.
offer
keep
self-directed
investor is allowed to move money
Account can be
thrifts,
To
to and
The
another gives
interest
transfer of
funds from
insurance
ahead
of the
IRAs in which the
from money market
funds, mutual funds, money market mutual funds,
and bonds.
of
CDs, stocks,
one instrument to
the bank a fees income and gives the investor
rate
account, started
options.
Next,
is
by Merrill Lynch.
the
cash
management
This account is a basic
securities account that adds the right to borrow against the
value of
the securities,
privileges, the
a checking account with overdraft
overnight
investment
of
funds
at market
rates of interest, and a Visa credit card.
Financial service
professionals have
financial planning services.
capital driven
strategies to
This
moves
started to offer
the
consumer driven
focus from
ones.
They
-
29
accounting, and
combine depository institutions, insurance,
securities into
one big
There is an increase in
service.
the amount of competition
in this
business. There
is also
an increase in the number of people looking for this type of
service, so if
the
advice
company rather
than the
is
existing
these costs,
already has
cross-selling is
then
and his
used
customers.
to
are
for new
existing customers, which
planning.
only
one-third
customers.
new
These files are
opportunities
never been
does
not
all
mean
the
other
types
right to gain the market.
entry
into
the
services
Chafee
securities
existing
believes
activities
offers today.
will not be offered by
forbidden to
offer a
of institutions will vie for the
Banks are currently searching for
securities
firms are trying to enter
John
for
allowed to engage in all of the
others, because if one institution is
an
To help cut
list the accounts that individual
services that the financial services industry
service
as
23
Banks have
This
New
used. Files are created, for
goals for the future.
target
benefits the
investor will leave
relationship
customers
expensive as new accounts
it
22
is
The last new concept
for
so
consumer, the
and look for another planner.
accounts
given
the
that
should
industry, while securities
banking
allowing
help
industry.
banks
small
to
Senator
deal
in
investors
by
offering services that were once available only to wealthier
-
30
individuals.
Henry
24
believes that
all of
Gonzales,
financial
reduce
the
industry
diversity
finances in the country.
involve
the
is
the
concentration of
25
activities that make up securities firms
underwriting,
Underwriting
a few
These conglomerates will
increase
and
in
result
will
conglomerates.
Currently the
Representative,
the mergers and acquisitions going on
in the financial services
giant
U.S.
a
dealing,
purchase
brokerage
and
of
new
services.
securities and the
distribution of these to clients.
Dealers purchase and sell
securities for their own account.
Brokers purchase and sell
securities only on the order of a customer.
Banks
can act
in all these capacities under limited circumstances.
To help
the
FDIC
nonmember
banks gain entry into the securities industry,
has
proposed
banks
to
bill
engage
proposal would require the
personnel separate
a
that
would
allow
in securities activities.
bank
to
keep
its
state
The
records and
from those of the securities subsidiary.
The subsidiary could sell,
underwrite, and
distribute only
top rated debt securities
on a best-effort basis and mutual
funds that invest only in
money
market
instruments.
The
bank would be restricted from purchasing any securities as a
fiduciary;
transacting trust department business through the
subsidiary; extending credit to issuers whose securities are
underwritten by the subsidiary;
the acquisition
of these
making loans
to people for
securities; accepting
collateral
31
consisting of these securities; and extending
subsidiary.
26
Opponents
believe
public has more trust
firms.
the
proposal is unfair because the
than they
in banks
because banks
This is
securities
because
firms
capital at lower rates
Federal Reserve
the
tax
deductions
of
this.
of
brokers
interest
for
is safer
and
firms by
Also,
and
credit rating
using the
banks have almost
banks
carrying
are
costs.
breaks are not offered to securities firms.
improve the
than others
Banks can get funding
than securities
discount window.
rate
do in securities
are insured and some people
will believe that the bank subsidiary
half
credit to the
allowed
These tax
Also banks can
of a bond by issuing a letter of
credit, whereas securities firms
are stuck
with the credit
rating that the firm has.
Proponents on
the other
hand, say
this will increase
the efficiency of banks and securities firms.
There will be
a reduction in risk and reduction in transaction costs.
newly fostered
competition
concentration
of
securities
firms
underwriting
They
are
currently
institutions
.-
Prudential.
The
that
such
the
not
still
done
competing
as
help
securities
would
1S
will
Sears,
break
up
industry.
handle
all
The
the high
Existing
securities
on the best-effort basis.
with
other
American
nondepository
Express
and
27
securities
industry
believes
that
depository
-
32
intervention
institution
will
drive
broker-dealers out of business
industry
services
financial
Currently exchanges
companies, and
must
concentrate
into
report
the entire
few large companies.
a
to
firms,
member
listed
Sometimes the member firms have
the public.
financing
a hard time
and
small, regional
the
their
expansion.
Banks
have the
capital capacity to support this growth, but member firms do
not want to be
driven out
listed companies
are fast
longstanding
that have
industry.
The
of business
by the
banks.
growing, highly innovative firms
relationships
firms
do
not
with
want
the securities
to
breakup
relationships by using banks for private placement.
private placement
these
If the
does not work out, the securities dealers
would begrudge taking the company back.
be protected
The
The
public may not
if a bank got into financial difficulty over a
securities
subsidiary.
securities
industry
28
These
does
not
are
want
all
to
reasons
why the
open its doors to
banking, however, banks feel differently.
Banks and others think
banks would
enhance the
The entry of securities
same.
The more
-
to
groups
and
securities
degree of
firms
affiliates of
competition in finance.
into
competition the
equity of the industry.
H1
that
banking
would
do the
better the efficiency and
The securities industry
ins broken
the most direct competition is within
these groups, although there is some competition between the
groups.
The most competition in the securities industry is
33
the entrance
of
insurance
Utilities are
industry.
with their direct
through
companies
into the
banks
become a form of competition too,
placement
of
to stockholder
securities
reinvestment
dividend
and
The
plans.
securities
industry is upset about the money being taken away from them
by these
competitors, but
the banking industry say brokers
took millions of dollars away
market funds.
Banks
from
them
have
entered
the
securities market little-byThey
traditionally
conservative,
been
generate high
of
taking
low-risk
firms
Securities
believe
profit.
are not
that
attitude
the
practices
high-risk
These attitudes
lS
competition
and
this
paper
products
the
of
that
are
best.
the
way to
must come together
somewhere or the two industries will never mesh.
Throughout
doing as
The reason for this is attitudes.
well as they had planned.
have
selling money
29
little and still want more freedom.
Banks
by
30
regulation, deregulation,
the
three
financial services have been discussed.
major
areas
of
Banking, securities
and insurance have crossed each others paths and must decide
what will happen next.
that the
-
results of
The best advice for them seems to be
deregulation must be permitted to work
themselves out.
If this is
more
efficient
national
will
disappear,
information
will
done the
financial system.
transaction
be
result will
costs
will
be a far
Excess profits
be
minimal, and
more readily available.
"Perhaps even
more
important,
improve
the
availability
industries,
strip
uncompetitive
ne,,of
sHay
sectors
American
resources
firms
enhance the underlying incentives
accelerat,e
technological
shift risk,
absorb economic
social
damage,
and
change,
3 1
ne ...'
from
sooner,
and
emerging
declining
quite
and
possibl;.-
save
and
t.o invest,
bolster
the
a h iIi t. ;"
t.o
and financial
generally
susta inable economic gro"th."
•
to
resources
and
system l,jll
financial
support.
t c
shocks ld th ] eS5
the
process
of
END NOTES
Reforming The Bank Regulatory
1.
Carron, Andrew.
Structure.
p. 2.
2.
Compton, Eric N.
p.230.
3.
Ibid. p.230.
The New World of Commercial Banking.
4.
Seglin, Jeffrey and Jeffrey Lauterbach.
Financial Planning in Banks. p.47.
5.
Baldwin, Ben G.
p.11.
6.
Ibid.
p.15.
7.
Ibid.
p.60.
8.
Ibid.
p.31.
9.
Corsi, Jerome R.
Thrift.
p.39.
Personal
The Life Insurance Investment Advisor.
Marketing Life Insurance in a Bank or
10. American Enterprise Institute.
Proposals to Deregulate
Depository Institutions.
p.46.
11. Hawke, John D.
p.42-44.
Commentaries on Banking Regulation.
12. Sametz,
Arnold W. Securities Activities of Commercial
Banks.
p.45.
13. Hawke, p.261.
14. Smith, Brian.
The Competitive Equality Banking Act:
What's in a Name? p.18-23.
15. Compton, p.217.
-.
16. Ibid,
p.220-221.
17. Ibid,
p. 223.
18. Ibid,
p. 231.
19. Ibid,
p.232.
20. Ibid,
p.214.
21. Sullivan, Charlene A.
p.14-17.
The New Risks in Consumer Credit.
.22. Seglin,
p.46.
23. Compton, p.143.
24. AEI,
p.31.
25. Ibid,
p.45.
26. Ibid,
p.34.
27. Ibid,
p.45.
28. Sametz,
p. 155.
29. Sametz,
p.143.
30. Conner, Daryl and Byron Fiman. Making the Cultural
Transition to Investment Banking.
p.32.
31. Walter,
Ingo.
Deregulating Wall Street. p.1-2.
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