Bank Oversight: Few Cases of Tying Have Been Detected

Published by the Government Accountability Office on 1997-05-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to Congressional Committees

May 1997
                BANK OVERSIGHT
                Few Cases of Tying
                Have Been Detected

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      General Government Division


      May 8, 1997

      The Honorable John D. Dingell
      Ranking Minority Member
      Committee on Commerce
      House of Representatives

      The Honorable Thomas J. Manton
      Ranking Minority Member
      Subcommittee on Finance and
        Hazardous Materials
      Committee on Commerce
      House of Representatives

      The Honorable Edward J. Markey
      House of Representatives

      With increasing cross-industry competition in financial services in the
      United States, market participants have raised concerns about the
      so-called tying provisions adopted in the Bank Holding Company Act
      Amendments of 1970. The provisions, which were enacted to safeguard
      against banks’ misuse of their perceived economic power, generally
      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.1 As you are
      aware, the banking industry generally advocates removal of the tying
      provisions, while certain securities firms, insurers, and independent
      insurance agents have advocated retaining or strengthening them.

      This report responds to your request that we provide information on
      banks’ compliance with the tying provisions and the views of financial
      industry representatives about the provisions. Specifically, the objectives
      of this report are to provide information about (1) evidence of tying
      abuses by banks and their affiliates and regulatory efforts to ensure
      compliance with the provisions, (2) views on the tying provisions
      expressed by representatives of securities and insurance firms and
      independent insurance agents, and (3) views on the tying provisions
      expressed by representatives of banks and bank regulators.

       Tying typically involves a customer being required to purchase a tied product or service from the
      bank or its holding company or one of its affiliates, but the practice may also involve a bank offering to
      discount the price of a product or service if the customer obtains another product or service.

      Page 1                                                              GAO/GGD-97-58 Tying Provisions

             When Congress passed the Bank Holding Company Act Amendments of
Background   1970, it prohibited tying practices by banks involving products other than
             those regarded to be traditional products provided by banks.2 The
             prohibition, in Section 106(b) of the 1970 amendments,3 was based on the
             unique role banks have in the economy, in particular their important role
             as a source of credit, which Congress feared could allow them to gain a
             competitive advantage in other financial markets. Section 106(b) applies
             only to banks and generally prohibits banks from tying any service or
             product, except for traditional bank products.

             The tying provisions also allowed the Federal Reserve Board to make
             exceptions that are not contrary to the purposes of the tying prohibitions.
             During the first 20 years after the enactment of the tying provisions, the
             Board received few requests from banking organizations for exceptions to
             the tying provisions, and it granted none. More recently, however, the
             Board has decided to use its exception granting authority to allow banks
             to offer broader categories of packaging arrangements if in its judgment
             they benefit consumers and do not impair competition.

             In 1971, the Board adopted a regulation that applied tying rules to bank
             holding companies and their nonbank subsidiaries, and at the same time it
             approved a number of nonbanking activities these entities could engage in
             under the Bank Holding Company Act. The Board recently relaxed the
             tying restrictions. Citing the competitive vitality of the markets in which
             nonbanking companies generally operate, the Board rescinded its
             regulatory extension of the statutory tying provisions to bank holding
             companies and their nonbank subsidiaries in February 1997. At the same
             time, the Board broadened the traditional bank products’ exception by
             expanding it to include those products when offered by the bank’s

             The other federal regulator with key responsibilities related to bank
             practices, such as tying, is the Office of the Comptroller of the Currency
             (OCC), which regulates U.S. national banks. In recent years, OCC has

              The act exempted from the tying prohibition a number of traditional banking products, defined
             specifically as “loans, discounts, deposits, or trust services” provided by banks, which were regarded
             to have little potential for anticompetitive effects.
              Section 106(b) of the Bank Holding Company Act Amendments of 1970, Pub. L. No. 91-607, 12 U.S.C.
             section 1972, prohibits three types of anticompetitive practices by banks: reciprocity arrangements,
             exclusive dealing, and tying, which is the subject of this report.
              This regulation expands on earlier Board exceptions that, among other things, allowed banks to offer
             products that included discounts on brokerage services and other products based on a customer’s
             relationship with the bank or bank holding company.

             Page 2                                                             GAO/GGD-97-58 Tying Provisions

increasingly allowed banks to expand the number of products and services
they offer. Concerns have been raised by some groups that OCC’s actions
allowing national banks to expand into new financial product markets
could lead to increased tying.

Many financial institutions that compete with banks and bank holding
companies, notably securities firms and insurance companies, are not
covered by the tying restrictions. However, they, along with banks and
their affiliates, are subject to the more broadly applicable antitrust laws,
such as the Sherman Act, which prohibit anticompetitive practices such as
tying arrangements. In a tying claim under the antitrust laws, a plaintiff
must prove, among other things, that the seller had economic power in the
market for the tying product, that the alleged tie had an anticompetitive
effect in the tied-product market, and that the arrangement did not have an
insubstantial effect on interstate commerce.5

This burden of proof contrasts with the less stringent evidentiary
requirements that apply to the bank tying provisions, which do not require
proof of any of the above three elements. Congressional hearing records
indicate that policymakers made plaintiffs’ burden of proof less stringent
for the tying provisions because they believed that proving an antitrust
violation involving banks, bank holding companies, and subsidiaries could
pose difficulties for plaintiffs. Their reasoning was that few plaintiffs could
be presumed able to readily ascertain a bank’s economic power in a
particular product or service market and its ability to impose a tying

Since 1980, increased cross-industry competition in the financial services
marketplace has altered the position banks occupy in the nation’s credit
market. Some have argued that this change could reduce a bank’s ability to
engage in tying activities. Aggregated balance sheet data show that the
banking sector’s share of the overall assets of U.S. financial intermediaries
declined from about 35 percent in 1980 to about 25 percent in 1994, as
shown in figure 1.6 In the same period, several other financial sector
participants, including mutual funds and government sponsored
enterprises (GSE), increased their share of those assets.

 See Integon Life Ins. Corp. v. Browning, 989 F.2d 1143, 1150 (11th Cir. 1993).
 Industry data also show that over the past three decades, banks and trust companies have made more
loans secured by real estate and fewer commercial loans. Commercial and industrial loans dropped
from 38 percent of bank lending in 1970 to 26 percent in 1994, while loans secured by real estate
increased from 25 percent to 43 percent.

Page 3                                                              GAO/GGD-97-58 Tying Provisions

Figure 1: Share of U.S. Financial
Intermediaries’ Assets
                                    36       35
                                    26            25                                               25
                                    22                    21
                                    18                                                                       16
                                    12                                     11
                                                                                10                                       10
                                    10                           9
                                     2                                                                               2
                                                                                                                                       0   1


                                                                                                      is d
                                                                                                       ra d


                                                                                                    de and

                                                                                                        po r



                                                                                                   d ke
                                                                                                   su n




                                                                                                 in s a



                                                                                                an ac





                                                                                              s b


                                                                                            ie t-

                                                                                         rit se




                                                                                       cu As


                                          Decrease in share of assets                Increase in share of assets


                                    Source: Federal Reserve Board.

                                    However, other changes in the marketplace, including the growth of new
                                    types of credit-related activities that do not appear on the balance sheet,
                                    may have had an offsetting effect on the banking industry’s position in the
                                    overall U.S. credit market. Two research papers7 by Federal Reserve staff
                                    have suggested that U.S. banks’ share of the credit market is not declining.
                                    One paper showed that the proportion of total bank revenues coming from

                                     Edward C. Ettin, The Evolution of the North American Banking System, Board of Governors of the
                                    Federal Reserve System, July 1994, and John H. Boyd and Mark Gertler, Are Banks Dead? Or Are The
                                    Reports Greatly Exaggerated? Federal Reserve Bank of Minneapolis, Quarterly Review, Summer 1994.

                                    Page 4                                                                        GAO/GGD-97-58 Tying Provisions

                   off-balance sheet banking activities, such as backup lines of credit,
                   guarantees to commercial paper issuers, and derivatives, rose from
                   25.0 percent in 1982 to 36.7 percent in 1995. But a lack of information
                   about the role these new off-balance sheet activities play in the U.S.
                   financial services market complicates attempts to assess recent overall
                   credit market trends or the effect these trends may have on banks’ market

                   Interest in the tying provisions has been heightened by regulatory actions
                   and Supreme Court decisions, most recently one in March 1996, that have
                   permitted banks to further expand their marketing activities in annuity
                   and insurance sales.8 These actions and decisions have added to the
                   insurance industry’s apprehensions about the banking industry’s
                   marketing of annuities and insurance and the possible effect it may have
                   on the banking industry’s ability to engage in tying activities. The future
                   impact of the tying provisions may also be affected by the outcome of
                   proposed reforms to the 1933 Glass-Steagall Act that would allow banks to
                   offer a greater range of services and products. Proposed reforms stem
                   from the belief that the separation of banks from securities firms and
                   insurers incorporated in the U.S. bank regulatory framework are
                   out-of-date in today’s converging credit and capital markets. Although
                   these proposals are viewed as potentially leading to greater efficiencies in
                   the marketplace, concerns have also been raised about their possible
                   effects on banks’ ability to link the services and products they offer by
                   engaging in tying.

                   We found limited evidence of tying activity by banks. Federal Reserve and
Results in Brief   OCC officials we interviewed were aware of only one violation identified
                   during regulators’ routine bank examinations or bank holding company
                   inspections since 1990. In addition, 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. Further, 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. Likewise, limited evidence of bank-tying activity has
                   been disclosed in private litigation involving allegations of illegal tying.
                   Finally, our interviews with state regulators, small business groups, and
                   others identified little evidence of tying violations, although it was

                    NationsBank v. Variable Annuity Life Insurance Co., 115 S.Ct. 810 (1995); Barnett Bank v. Nelson, 116
                   S.Ct. 1103 (1996).

                   Page 5                                                            GAO/GGD-97-58 Tying Provisions

                     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.

                     Some representatives of securities and insurance firms and independent
                     insurance agents we contacted were concerned about tying by banks.
                     Independent insurance agents we contacted expressed the greatest
                     concern about tying practices. Those representatives and agents that
                     expressed concern about tying advocated maintaining or strengthening the
                     tying provisions as a way of offsetting the competitive advantages they
                     believe banks enjoy, such as access to the Federal Reserve’s discount
                     window and coverage by federal deposit insurance. Some industry
                     representatives and academic experts we interviewed said that a more
                     important consideration than the banking industry’s share of the credit
                     market is the availability of credit, specifically the credit available to small
                     businesses in certain geographic areas.

                     Bank industry representatives viewed the tying provisions as impairing
                     banks’ ability to maximize the economic benefits they might otherwise
                     obtain by offering complementary services. 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. 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.
                     They also said that banks pay for deposit insurance through premium
                     assessments and are subject to more stringent regulatory restrictions and
                     oversight than competing firms in other financial sectors. Banking
                     regulators expressed varying views of the need for the provisions. 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. During discussions, some regulatory staff
                     of the agencies expressed the belief that the tying provisions may have a
                     deterrent effect, but others believed the provisions have little effect since,
                     in their view, increased competition in the marketplace makes it difficult
                     for banks to force a borrower into a tying arrangement.

                     The objectives of our review were to provide information on (1) evidence
Objectives, Scope,   of violations of the tying provisions by banks and their affiliates and
and Methodology

                     Page 6                                             GAO/GGD-97-58 Tying Provisions

regulatory efforts to ensure compliance with the provisions, (2) views on
the tying provisions expressed by representatives of securities and
insurance firms and independent insurance agents, and (3) views
expressed by representatives of banks and bank regulators.

In addition to reviewing bank regulators’ files for evidence of possible
tying abuses, we contacted (1) the Securities Industry Association (SIA) to
obtain referrals to securities firms that were concerned about tying
activities, (2) groups representing insurance companies and agents who
may have knowledge of tying activities, and (3) academic experts. Based
on referrals from SIA, we spoke with officials at six securities firms and
groups representing securities firms in New York; San Francisco;
Washington, D.C.; and Richmond, VA, to obtain their views on the
continuing need for the tying provisions. Based on insurance industry
referrals, we had similar discussions with officials of eight insurance
companies and groups representing insurance companies and agents in
New York; Washington, D.C.; San Francisco; and Lynchburg, VA.

We also interviewed officials representing 11 state financial regulators9
and representatives of 24 local governments or consumer/small business
advocates in Texas, California, North Carolina, and Minnesota to
determine if any tying complaints had been directed to them. We
interviewed consumer/small business organizations in North Carolina and
Minnesota, two states that have allowed state-chartered banks to sell
insurance, because we were told that instances of insurance product tying
were most likely to show up in such states if they were occurring. In
addition, we contacted the Securities and Exchange Commission and the
Federal Trade Commission to determine whether they had received tying
complaints involving banks. We also reviewed studies of private litigation
under the tying provisions and updated this information with our own
legal research. We conducted our interviews prior to the Board’s
September 1996 proposal to relax the tying restrictions.

To identify possible tying abuses and regulatory practices used to detect
and prevent such abuses, we interviewed Federal Reserve and OCC
examiners and officials about the results of their routine examinations and
about their procedures and practices during routine examinations. We
focused on the Federal Reserve and OCC because the banks or bank
holding companies they regulate are more likely to offer a broader range

 Interviews were conducted with state financial regulators, including banking department officials, in
the states of Alaska, Arizona, California, Hawaii, Idaho, Minnesota, Montana, Nevada, Oregon, Texas,
and Utah. These states were selected because they are rural or relatively thinly populated and thus
might likely be affected by declining credit availability.

Page 7                                                            GAO/GGD-97-58 Tying Provisions

of products and services, which are believed to be susceptible to tying.10
To determine how examiners implemented examination procedures for
tying, we also judgmentally selected three examinations conducted in 1994
at a large, medium, and small bank by the OCC Dallas office and three
inspections conducted at bank holding companies with insurance or
securities activities by the Dallas Federal Reserve Bank. We also reviewed
examinations conducted by the San Francisco Federal Reserve during
1993 and 1994 of banks identified as not being in compliance with the tying
requirements. We spoke with agency attorneys and examiners about the
special joint Federal Reserve and OCC investigation of specific allegations
involving tying violations and reviewed related workpapers. We also
reviewed complaint files at the Board in Washington, D.C., and OCC
headquarters to determine the number and type of complaints received
about tying violations. In addition, we interviewed representatives from
two corporations and eight local government organizations in California
whose transactions were identified as being affected by tying in a
complaint to the Federal Reserve.

To obtain the banking industries’ views on the continued need for the
tying provisions, we contacted officials from (1) four banking trade
associations located in Washington, D.C., and Austin, TX, and (2) three
banks in San Francisco and New York. We also discussed the tying
provisions’ effects on the industry with regulators from the Federal
Reserve and OCC in Washington, D.C., Dallas, San Francisco, and New
York. In addition, we spoke with Federal Reserve officials in Richmond,
VA. We also spoke with Federal Reserve economists in Washington, D.C.,
Richmond, VA, and a former Federal Reserve economist in Minneapolis on
changes in the credit market.

We conducted our work from April 1995 through November 1996 in
accordance with generally accepted government auditing standards. We
provided a draft of this report for comment to the Chairman of the Board
of Governors of the Federal Reserve System, the Comptroller of the
Currency, and the Chairman, FDIC. The resulting written comments are
discussed on p. 17 and reprinted in appendixes I, II, and III.

  We did not perform work at the Federal Deposit Insurance Corporation (FDIC) because officials
from FDIC’s Division of Supervision in Washington, D.C., told us that few banks regulated by FDIC are
directly involved with securities underwriting, dealing, or private placements—activities that are more
likely to be subject to tying than other activities.

Page 8                                                            GAO/GGD-97-58 Tying Provisions

                       We found little evidence of tying by banks. Agency officials we
Evidence of Tying by   interviewed were aware of only one instance of a tying violation identified
Banks Has Been         during regulators’ routine examinations of banks or inspections of bank
Limited                holding companies since 1990. Likewise, they said regulators’
                       investigations of complaints since 1990, including an SIA allegation of tying
                       practices at several banks and bank holding companies, have identified
                       only a few instances of tying.

                       Inquiries with a cross section of state and local officials, academic experts,
                       consumer groups, and small business contacts who we were told were
                       knowledgeable about tying likewise revealed few instances of bank tying.
                       Several bank representatives have argued that the lack of evidence
                       indicates that tying is not occurring, although others believe that it
                       indicates that the tying provisions are having a deterrent effect on such
                       activity. Finally, the limited evidence of tying may be indicative of the
                       difficulty involved in identifying instances of tying or consumers’ general
                       hesitance to report such instances due to their reluctance to jeopardize
                       their credit relationships.

Routine Examinations   During routine examinations, both OCC and Federal Reserve examiners are
Revealed Few Tying     expected to evaluate a banking organization’s compliance with the tying
Abuses                 provisions. They are also expected to investigate potential tying practices
                       that they become aware of during the course of their work. OCC officials
                       said they were not aware of any instances of tying identified through their
                       routine examinations since 1990. Over the same period, Federal Reserve
                       officials cited one instance of tying identified during a bank examination.
                       Officials at both agencies explained that tying violations are difficult to
                       find during examinations because illegal tying arrangements are not
                       clearly evident in loan documentation, and it is difficult to know where to
                       look for evidence of tying without a specific complaint.

                       OCC procedures require examiners to look for tying arrangements among
                       the various types of loans being reviewed, including commercial, real
                       estate, and construction loans. Examiners are expected to address tying
                       practices along with other credit-related bank practices while reviewing
                       credit and collateral files, especially those relating to loan agreements.

                       Federal Reserve procedures also require examiners to review tying
                       policies and to follow an inspection checklist in their examinations.
                       Examiners are required to review bank holding companies’ and
                       state-chartered banks’ written policies and procedures, training programs,

                       Page 9                                            GAO/GGD-97-58 Tying Provisions

                             and audit practices. These reviews are to look at a bank’s review of
                             pertinent loans where products or services may be susceptible to
                             improper tying arrangements and to include a review of specific
                             transactions if the banking organization is found to be deficient in its
                             antitying policies and procedures. In addition, procedures call for
                             examiners to assess whether employees are aware of tying and of how to
                             prevent tying violations. Finally, examiners are required to determine
                             whether internal audit departments perform any work to detect or prevent
                             tying violations.

                             In the nine OCC and Federal Reserve examinations or inspections we
                             reviewed, we found that examiners followed required examination
                             procedures for monitoring compliance with the tying provisions. Although
                             the portions of these OCC and Federal Reserve examinations or inspections
                             devoted to tying, which typically involved 1 to 2 days of work, were less
                             extensive than other portions, it appeared that examiners performed the
                             required steps to review the adequacy of an institution’s antitying

Regulators’ Investigations   Examiners told us that specific complaints filed with the regulatory
of Complaints Revealed       agencies were the most effective means of detecting tying violations.
Few Tying Abuses             However, they said that few complaints have been brought to their
                             attention over the years. Both OCC and the Federal Reserve typically
                             handle complaints from their Washington, D.C., headquarters offices,
                             although consumers can notify the regulators of tying complaints at either
                             the district or headquarters level. From January 1990 through
                             September 1996, records show that the regulators received a total of only
                             13 tying complaints, of which 7 were handled by OCC and 6 were handled
                             by the Federal Reserve.

                             Records also show that at the time of our review, seven cases were
                             determined to be unfounded, three resulted in actions against the bank or
                             holding company, and the remaining three were unresolved, as shown in
                             table 1. The three cases that resulted in actions against the bank or holding
                             company were resolved through written agreements or orders by the
                             Federal Reserve, one of which included a $10,000 civil penalty.

                             Page 10                                          GAO/GGD-97-58 Tying Provisions

Table 1: Resolution of Tying
Complaints Received by the Federal                                                            Federal
Reserve and OCC From January 1990    Resolution                                               Reserve           OCC        Total
Through September 1996               Action against the bank or holding company
                                       Administrative action                                          3                       3
                                       After investigation                                            2             3         5
                                       By the court                                                   1             1         2
                                       On appeal                                                                    1         1
                                       Pending investigation                                                        1         1
                                       Other                                                                        1         1
                                     Total                                                            6             7        13
                                       One case was never resolved because the bank closed before OCC could follow up on

                                     Source: Federal Reserve and OCC.

Regulators’ Special Tying            A 1992 complaint by SIA prompted the Federal Reserve and OCC to launch a
Investigation Found One              special investigation of tying abuses that ultimately identified one violation
Violation                            of the tying provisions. The investigation, which represented an extensive
                                     joint effort by the two regulators, was undertaken largely as a response to
                                     SIA solicitation of its membership that elicited a small number of
                                     responses. An SIA official we contacted attributed the low number of
                                     responses to members’ reluctance to jeopardize their banking
                                     relationships. Nevertheless, one large securities firm responded with a list
                                     of transactions involving characteristics that might indicate tying abuses.
                                     SIA included this list in its complaint to OCC and the Federal Reserve.

                                     In response to the complaint, OCC and the Federal Reserve agreed to
                                     jointly investigate seven large bank holding companies and four large
                                     banks. During the investigation, the regulators reviewed 344 transactions
                                     from a universe of 3,213 transactions that included both credit and
                                     underwriting components completed between 1987 and 1992. They
                                     reviewed transaction fee structures to determine if fee-splitting was
                                     prevalent, interviewed selected customers as well as bank holding
                                     company and bank officials, and attempted to determine if the bank and
                                     nonbank subsidiary referred customers to one another.

                                     The investigation found 24 transactions that were regarded as suspicious
                                     out of the 344 transactions reviewed. The examiners found that these

                                     Page 11                                                      GAO/GGD-97-58 Tying Provisions

                             suspicious transactions generally involved either aggressive marketing by
                             bank officers or discounts offered by a bank to customers who purchased
                             more than one nontraditional bank product or service. In the one instance
                             in which the team concluded regulatory action was required, regulators
                             found three questionable transactions. One involved a loan officer who
                             included on a terms sheet sent to the customer a condition that the bank’s
                             affiliate be selected for placement of a revenue bond issue. The case was
                             resolved through an agreement reached by Federal Reserve officials and
                             bank officers that required the bank to strengthen its policies, procedures,
                             and internal compliance program relating to compliance with the tying

Litigation Results Did Not   Our review of legal literature and cases shows that private claims of
Indicate Tying Was a Major   unlawful bank tying have been relatively infrequent and that the courts
Problem                      seldom have found violations of the tying provisions. Three studies we
                             identified noted limited use of the tying provisions. For example, one
                             study published in 1993, which identified 44 federal court decisions
                             published since 1972 that involved the tying provisions, reported that the
                             courts found violations in only 4 cases.11 Our research of cases decided
                             after 1992, reviewing 43 federal court decisions and 9 state court decisions
                             involving bank tying allegations, found no decisions in which a bank was
                             found liable for violating the tying provisions.12

State, Local, and Trade      Our discussions with representatives of various groups, including state
Groups Disclosed Little      regulators, academic experts, small business trade organizations, and
Evidence of Tying, but       firms identified as possible sources by SIA, produced little evidence of tying
                             practices by banks. For these discussions, we selected insurance groups,
Industry Sources Differed    small business trade organizations, and chambers of commerce that we
on Reasons                   were told had a close relationship with businesses that might be affected if
                             tying were occurring. Financial regulators in 11 states, representatives of 8
                             local governments, and 16 consumer or small business groups, were
                             generally not aware of or were unable to provide any details on complaints
                             of tying. In a few instances in which we learned of a complaint, the
                             affected parties would not respond to our inquiry or said that they were
                             concerned that the use of their information would affect their relationship

                              Bernard Shull, Tying and Other Conditional Agreements Under Section 106 of the Bank Holding
                             Company Act: A Reconsideration, The Antitrust Bulletin, Winter 1993.
                              In one state court decision, the court determined that a bank and trust company had engaged in an
                             unlawful tying arrangement under the tying provisions but was not liable because the plaintiff was not
                             harmed by the tying arrangement. Connell v. East River Savings Bank and Trust Company of New
                             Jersey, 666 A.2d 1379 (NJ Super. Ct. 1995).

                             Page 12                                                           GAO/GGD-97-58 Tying Provisions

                           with their bank. Some securities and insurance representatives also
                           claimed to be aware of bank tying activities but said they were unable to
                           obtain permission from their customers to release the information to us.

                           Although the limited evidence of tying may indicate that little tying is
                           actually occurring, other explanations that possibly account for the lack of
                           evidence include consumers’ reported reluctance to make formal
                           complaints and the difficulty of detecting tying practices. Some bank
                           representatives maintain that the lack of evidence indicates that tying is
                           not occurring to a significant extent because market forces allow few
                           opportunities, and that the provisions are thus unnecessary. Others,
                           including some regulators and representatives of securities firms, agree
                           that the lack of evidence indicates little tying is occurring but maintain
                           that the absence of tying is a result of the deterrent effects of the tying
                           provisions and the associated regulatory monitoring. It is also possible
                           that the limited evidence of tying may reflect consumers’ reluctance to
                           make formal complaints, as in instances we encountered when borrowers
                           were reportedly reluctant to talk with us for fear of jeopardizing their
                           relationship with a bank. Finally, the possibility cannot be ruled out that
                           the shortage of evidence of tying may indicate the difficulty consumers or
                           regulators have identifying tying violations.

                           The extent of concern about tying varied within the insurance and
Securities and             securities industries. Industry groups that were most concerned about
Insurance Industry         tying by banks included independent insurance agents, who expressed the
Representatives Most       greatest concern, and some insurance and securities firms that viewed
                           banks as a threat to their share of the market. Representatives of firms and
Concerned About            agents that expressed concern about tying advocated maintaining or
Tying Viewed Banks         strengthening the tying provisions, which they said help offset banks’
                           competitive advantages and ensure adequate consumer protection.
as a Threat to Their
Market Share
Insurance and Securities   Insurance industry representatives we contacted who said tying was a
Representatives Favor      problem were generally concerned about the ongoing expansion of bank
Maintaining or             services into insurance. One such representative expressed particular
                           concern about the tying of various common types of insurance policies
Strengthening Tying        easily linked to bank customers’ preexisting bank-related business.
Measures as Banks          Potential markets she cited included the profitable markets of automobile
Diversify                  loans, where she said that banks will likely increasingly take over
                           automobile insurance sales, and mortgages, where she said that banks

                           Page 13                                          GAO/GGD-97-58 Tying Provisions

                            could be expected to take over title and homeowners insurance sales. She
                            added that basic competitive pressures push banks toward aggressive
                            sales behavior that verges on violating the tying provisions when they
                            influence customers to take products or services or offer discounts. She
                            said that most insurance agents believe that banks at times violate the
                            tying provisions in offering complementary services and products to
                            customers, but that it is difficult to detect such instances.

                            Representatives of a major association of independent insurance agents
                            had initially expressed concerns about OCC actions that have allowed
                            national banks to expand their insurance activities and about court
                            decisions upholding these actions. However, in November 1996, the
                            association changed its position and supported the possible integration of
                            financial services. In doing so, however, it expressed its view that future
                            federal legislation should establish the states as the “functional regulators”
                            responsible for insurance activities along with the continued enforcement
                            of the tying provisions by federal banking regulators.13

                            Securities industry representatives have also expressed concern about
                            proposals to eliminate the tying provisions. For instance, a securities firm
                            association and a securities firm we contacted expressed concerns about
                            changes in the laws regarding tying prohibitions in the face of pending
                            reforms to the Glass-Steagall Act. Both said that they opposed any easing
                            of the tying provisions because of their view that such restrictions are
                            necessary for fair competition in the financial market.

                            Proponents of maintaining or strengthening the tying provisions from the
                            insurance and securities industries said that the tying restrictions are
                            needed to offset banks’ economic advantages. They argued that such
                            economic advantages derive from banks’ access to the Federal Reserve’s
                            discount window and their coverage by federal deposit insurance, both of
                            which are perceived as either lowering the cost of funds or reducing the
                            amount of capital banks need to hold as a buffer against risk to satisfy

Concerns About Market       Although some viewed overall credit market changes occurring since 1980
Concentration for Some      as an indication that banks may now be less able to engage in
Products in Local Markets   anticompetitive tying practices than when the tying provisions were
                            adopted, others, including insurers, securities firms, and academic

                              Functional regulation involves regulation of all similar business activities in the financial services
                            industry by a federal or state regulator designated to supervise those activities regardless of whether
                            the activity is performed, for example, by a bank, securities firm, or insurer.

                            Page 14                                                             GAO/GGD-97-58 Tying Provisions

                         experts, have suggested that certain specific markets may still be
                         susceptible to the exercise of market power. Instead of focusing on broad
                         measures of banks’ share of the overall U.S. credit market, they suggest
                         that the focus should be on the availability of credit to small businesses in
                         certain geographic areas.

                         Recent economic analyses of changes in the banking industry and in the
                         availability of credit provide differing views on the effects these changes
                         may have on small borrowers.14 Several papers observe that small
                         borrowers in certain local credit markets may be more likely affected by
                         the exercise of market power by banks than those in other localities. While
                         some agree that consolidation of the banking industry may result in a
                         decline in the number of small banks, the main lender to small businesses,
                         they disagree on the effects this decrease will have on the availability of
                         credit to small businesses. For example, one paper suggests that with the
                         likely decline in the number of small banks, the flow of credit to small
                         businesses will likely decline. Another observes that if small businesses
                         are not being served, large banks will have a strong profit motive to
                         expand their small business lending.

                         Banking industry officials we contacted believed that marketplace
Bank Representatives     changes since the passage of the tying provisions over 25 years ago have
Viewed Tying             significantly reduced the original economic justification for the tying
Provisions as Limiting   provisions. The officials said that the provisions have been made largely
                         unnecessary by increased competition among credit providers in the
Banks’ Ability to        financial marketplace. This increased competition, they said, makes it
Compete                  more difficult for any particular bank to exert sufficient credit leverage to
                         force a customer into a tying arrangement. Those holding this view point
                         to the reduction in banks’ share of the overall U.S. credit market.

Arguments for Removing   Several bank representatives we contacted expressed a desire to have
the Tying Provisions     Congress remove the tying provisions, particularly since they believed
                         there is limited evidence of tying violations. They noted that banks alone
                         are subject to the tying provisions, which do not prevent other financial
                         institutions from combining products that banks are prohibited from

                          Lawrence J. White, Tying, Banking, and Antitrust: It’s Time for a Change, Leonard N. Stern School of
                         Business, New York University, July 1994; Allen N. Berger, Anil K. Kashyap, and Joseph M. Scalise, The
                         Transformation of the U.S. Banking Industry: What a Long, Strange Trip It’s Been, Brookings Papers on
                         Economic Activity, 2:1995; Philip E. Strahan and James Weston, Small Business Lending and Bank
                         Consolidation: Is There Cause for Concern? Federal Reserve Bank of New York, Current Issues in
                         Economics and Finance, March 1996; and John A. Weinberg, Tie-in Sales and Banks, Federal Reserve
                         Bank of Richmond, Economic Quarterly, Spring 1996.

                         Page 15                                                          GAO/GGD-97-58 Tying Provisions

linking. An official from one bank noted that securities firms are subject
only to the less restrictive antitrust laws applicable to all businesses,
which require, among other things, that a plaintiff demonstrate that the
firm charged with tying has sufficient economic power to enable it to tie
and that a tying arrangement has a substantial effect on interstate
commerce. In contrast, the official noted, the tying provisions do not
require the plaintiff to demonstrate the bank’s market power.

Bank officials we contacted also pointed out that maintaining internal
controls to guard against tying within banks adds extra costs that other
financial providers do not bear. They said such internal controls limit
information, resource, and financial linkages between banks and their
holding companies or affiliated entities. According to the officials, the
internal control limitations impair economies of scale otherwise possible
in the provision of complementary services. In addition, they said
customers are adversely affected by banks’ inability to reduce overall
prices by offering complementary services as a package.

Bank industry representatives we contacted disagreed that banks have a
competitive advantage that must be offset by requirements, such as the
tying provisions. They acknowledged that banks have access to the
Federal Reserve’s discount window and federal deposit insurance, but
they do not view these as advantages. They pointed out that banks pay for
deposit insurance through premium assessments and are subject to
regulatory restrictions and to oversight of their activities that competing
firms in other sectors are not subject to. A banking representative also
pointed out that, with the passage of the 1991 Federal Deposit Insurance
Corporation Improvement Act, it is now easier for the Federal Reserve to
lend directly to all types of financial firms with liquidity needs in a
crisis—not just banks.

Given the ongoing convergence of credit and capital markets, banking
officials expressed concerns about potential adverse effects on their
industry if the tying provisions are not relaxed or removed. They felt that
the existence of the Sherman Act obviates the need for the tying
provisions. They did not feel that the banking industry has special
characteristics that necessitate a separate set of provisions.

Page 16                                          GAO/GGD-97-58 Tying Provisions

                    In response to our questions about the need for the tying provisions, OCC’s
Views of Bank       official view emphasized the importance of the provisions that prohibit
Regulators on the   banks from conditioning the availability of one product on the purchase of
Need for the        another, while the Federal Reserve chose not to provide an official
                    position. OCC observed that the tying provisions increase banks’ awareness
Provisions          of their responsibilities to their customers as they expand the array of
                    products and services offered. For example, OCC, in its October 1996
                    guidance to national banks regarding sales of insurance and annuities,
                    stated that the agency remained committed to enforcing the provisions
                    and emphasized the need for national banks to maintain procedures to
                    prevent violations. Although the Federal Reserve responded that the
                    agency had no official position on our questions about the need for the
                    tying provisions, it likewise has cited the tying provisions in connection
                    with its recent action to ease restrictions on banks’ marketing activities.
                    For example, in November 1996, the Federal Reserve noted the role of the
                    tying provisions in preventing banks from gaining unfair competitive
                    advantages by tying or otherwise linking their products together.

                    We also discussed the tying provisions with staff at both agencies. In
                    general, the staff were not surprised that we had found limited evidence of
                    bank tying, but they expressed mixed views on the reasons. Several
                    regulators attributed the lack of evidence to the tying provisions’ deterrent
                    effects or to the difficulty involved in finding documentation to support
                    allegations of tying. Other regulators believed that increased competition
                    among credit providers makes it difficult for any particular bank to exert
                    enough economic leverage to force a borrower into a tying arrangement. A
                    Federal Reserve official suggested that the sophistication and price
                    sensitivity of today’s consumers limit banks’ ability or power to tie
                    products. He explained that, although consumers may not realize that
                    tying is illegal, they are able to recognize a bad deal when they see it.

                    The Federal Reserve, OCC, and FDIC reviewed a draft of this report and
Agency Comments     either agreed with the information presented or had no formal comments.
                    The comment letters are reprinted in appendixes I, II, and III. In its
                    comments, the Federal Reserve suggested that we had found that it had
                    effective examination procedures to review compliance with the tying
                    provisions. Our review, however, did not assess the effectiveness of the
                    Federal Reserve’s examination procedures.

                    Page 17                                          GAO/GGD-97-58 Tying Provisions

As agreed with your office, unless you publicly announce the report’s
contents earlier, we plan no further distribution of it until 7 days from the
date of this report. We will then send copies to the Chairman of the House
Commerce Committee, and to the Chairmen and Ranking Minority
Members of the Senate and House Banking Committees. We will also send
copies to the Chairman of the Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, and the Chairman, FDIC. We will
also make copies available to others on request.

This report was prepared under the direction of Kane A. Wong, Assistant
Director, Financial Institutions and Markets Issues. Other major
contributors are listed in appendix IV. If you have any questions, please
call me on (202) 512-8678.

Thomas J. McCool
Associate Director, Financial Institutions
  and Markets Issues

Page 18                                           GAO/GGD-97-58 Tying Provisions
Page 19   GAO/GGD-97-58 Tying Provisions

Letter                                                                                               1

Appendix I                                                                                          22

Comments From the
Federal Reserve
Appendix II                                                                                         23

Comments From the
Office of the
Comptroller of the
Appendix III                                                                                        24

Comments From the
Federal Deposit
Appendix IV                                                                                         25

Major Contributors to
This Report
Table                   Table 1: Resolution of Tying Complaints Received by the Federal             11
                          Reserve and OCC From January 1990 Through September 1996

Figure                  Figure 1: Share of U.S. Financial Intermediaries’ Assets                     4


                        FDIC       Federal Deposit Insurance Corporation
                        GSE        government sponsored enterprise
                        OCC        Office of the Comptroller of the Currency
                        SIA        Securities Industry Association

                        Page 20                                          GAO/GGD-97-58 Tying Provisions
Page 21   GAO/GGD-97-58 Tying Provisions
Appendix I

Comments From the Federal Reserve

             Page 22           GAO/GGD-97-58 Tying Provisions
Appendix II

Comments From the Office of the
Comptroller of the Currency

              Page 23             GAO/GGD-97-58 Tying Provisions
Appendix III

Comments From the Federal Deposit
Insurance Corporation

               Page 24         GAO/GGD-97-58 Tying Provisions
Appendix IV

Major Contributors to This Report

                        David P. Tarosky, Senior Evaluator
General Government      Mitchell B. Rachlis, Senior Economist
Division, Washington,
                        Jeanne M. Barger, Project Manager
Dallas Field Office     Ellen G. Thompson, Evaluator

                        Abiud A. Amaro, Evaluator
San Francisco Field     Gerhard C. Brostrom, Communications Analyst
                        Paul G. Thompson, Attorney
Office of the General
Counsel, Washington,

(233474)                Page 25                                       GAO/GGD-97-58 Tying Provisions
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:


or visit GAO’s World Wide Web Home Page at:


United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested