Financial Services Modernization Act (1999) history

Also known as the Gramm-Leach-Bliley Act; legislation passed in late 1999 reforming the structure of American banking. Since the late 1980s, the FEDERAL RESERVE had allowed commercial banks greater leeway in such previously proscribed activities as INVESTMENT BANKING and insurance underwriting. The Fed did so under the authority of the BANK HOLDING COMPANY ACT, the law that gave it the authority to govern a bank holding company’s activities. But the Fed’s ability to liberalize a bank’s activities fell short of allowing a complete return to investment banking and insurance.

Commercial banks had been pressing Congress for years to abolish the BANKING ACT OF 1933 (Glass-Steagall Act). They argued that the securities business was a natural complement to their overall banking activities and that being able to deal and underwrite securities was vital to their health in an increasingly global economic environment. As a result, the 1999 act repealed the existing limitations on a bank’s ability to own or merge with securities firms and insurance companies. It also created a new form of HOLDING COMPANY called the financial holding company. Subsidiaries of this new holding company that did not engage in banking would be able to engage in securities and insurance underwriting.

Banks possessing a federal charter can also engage in the same activities but must do so in financial subsidiaries, allowing them to do virtually the same activities as a bank holding company. These provisions allow banks to engage in activities not permitted since the 1930s, but the old separation of securities and banking activities within the same unit of the bank is still followed.

In addition, the act provided for fuller disclosure of ATM fees and use of plain language from federal banking regulators, beginning in 2000. Another law affected by the new bill, the COMMUNITY REINVESTMENT ACT of 1977, was protected under the new law, which did change procedures in how the banks were to be examined under the 1999 act in the future. The net effect of the organizational part of the bill was to allow banks to create financial supermarkets—financial institutions where all sorts of financial services could be found under one roof.

The law was passed after CITIBANK agreed to be acquired by the Traveler’s Group, an insurance company. Under the existing banking laws, the merger would not have been allowed, but the Federal Reserve Board permitted the merger provided that certain conditions were met. As part of the merger deal, the new Citigroup was given two years to comply with the existing banking laws. But within a year, the new law was passed, allowing the merger to stand. The new banking law allowed American banks to behave more like European banks by owning other types of financial service companies without serious restriction.

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