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Remarks by Governor Laurence H. Meyer
Before the American Law Institute and American Bar Association, Washington, D.C.
February 15, 2001

Implementing the Gramm-Leach-Bliley Act: One Year Later
Last year I spoke at this conference about the challenges of implementing the large and
hugely complex Gramm-Leach-Bliley Act (GLB), the legislation that modernized our
financial system for the twenty-first century. In the intervening twelve months, much has
been accomplished. In keeping with the complexity of both the legislation and the issues,
much remains to do. Today I would like to discuss both what we have done and what we
will be doing, but, as I did last year, I will also try to give you some flavor of the issues we
faced in making our decisions and how and why we came out as we did.
Some of you may recall that I emphasized last year that GLB had two broad kinds of
provisions. The first set was specific and explicit. In provisions, for example, such as the
standards for becoming a financial holding company (FHC), the list of activities
automatically permissible for FHCs, and cross-marketing restrictions with companies owned
under merchant banking authority, the Congress told the banking agencies exactly what to
do and how to do it, with little or no room for interpretation. Other provisions, such as the
reasonable holding period for merchant banking investments and the specifics of permissible
routine management for firms owned under that authority, were broad-brush, with little or
no guidance for implementation. Most of the provisions were in the first category, perhaps
reflecting the long time that the Congress has been debating the issues; when it finally acted,
the lawmakers knew exactly what they wanted. The potatoes, as it were, had cooled and
were reasonably easy to handle. In the second category of provisions, either the issues were
particularly technical, or consensus was not reached; and hence the warmer--if not the hot-potatoes were handed to the agencies with the understanding that the decisions reached there
were unlikely to result in unanimous acclaim. If that kind of decision were possible, the
Congress would have reached it.
I will begin by briefly reminding you of the thrust of GLB. GLB did not start with an
entirely fresh sheet of paper but rather built on the pre-existing bank holding company
structure. As such, the new activities authorized--all of which are financial--were to be
contained in holding company affiliates or, with several exceptions, in financial subsidiaries
of banks under certain broad constraints. The new activities were limited to companies that
meet certain capital, management, and other tests. The holding company structure was
favored explicitly as the vehicle to create the maximum separation between the bank and the
new activities--both to protect the bank from the risk of the new activities and to avoid the
extension of the safety net subsidy to a wider range of activities.
This structure also retained the existing regulatory framework--with primary oversight of
individual legal entities by functional regulators (if any) and umbrella supervision of the

holding company by the Federal Reserve. The holding company framework also facilitated
the so-called two-way street, permitting not only banking organizations to enter, de novo or
by acquisition, the securities and insurance business but also securities and insurance
organizations to enter the banking business, all the while leaving unchanged the regulation
of individual legal entities. Though merchant banking--unlimited direct investment in
nonfinancial companies for some limited holding period--was explicitly authorized for the
newly created FHCs, full commerce and banking--the combining of nonfinancial and
financial enterprises as integrated businesses--was explicitly rejected. Potential new
activities must be evaluated on their financial--no longer banking--nature, as well as on
whether they are complementary to finance--rather than on their intimate relationship to
This structure, of course, has some obvious tensions that, themselves, reflect some difficult
compromises. These tensions, as we shall see, mean that both the regulators and the
regulated face no bright lines on the commerce and banking front. The tensions also mean
continuing frustrations on both sides as technology, innovation, and plain probing and
creativity test the frontier. The Congress indicated that it wanted the system to evolve and
gave the Federal Reserve the ability and authority to set the limits and, as events dictate, to
adjust them within a broad range.
One final introductory note perhaps is in order, and that is that GLB has not, as yet, induced
a dramatic break with the past. It is true that we have seen the formation of almost 500
FHCs, twenty or so by foreign banking organizations. But the surprise is that three-quarters
of the domestic FHCs have assets of less than $500 million, and half of these have assets of
less than $150 million. We do not yet have full data, but these smaller entities creating
FHCs--as well as the regionals--appear to be most interested in using the insurance agency
and merchant banking powers authorized by GLB and far less interested in securities and
insurance underwriting. And, of course, insufficient time has passed for more than a very
few to have exercised even these more limited powers in a large way.
Perhaps the second surprise is the lack of news among the largest entities, which most
observers thought would be the significant beneficiaries of GLB. Only a small number of
large FHCs have purchased securities firms since enactment of GLB, with the two largest
involving FHCs based on large foreign banking organizations. The benefit of GLB to large
domestic FHCs appears to be not so much the creation or acquisition of new securities
subsidiaries as it is the freedom to exempt their pre-existing section 20 affiliates from the 25
percent revenue test constructed by the Board to comply with the old Glass-Steagall Act. No
FHC has acquired a large U.S. insurance company since the Citi-Travelers merger before
GLB. To date, only one broker-dealer, Charles Schwab, has purchased a commercial bank
and become an FHC; only two other broker-dealers, both relatively small, have applied to
the Board to buy a small bank. One large insurance underwriter was approved to acquire a
bank and become an FHC since Citi-Travelers, and that bank is a small bank. Another
insurance firm has filed an application to buy a bank, again small, and become an FHC. In
short, except for the two foreign FHC acquisitions of large U.S. securities firms, there have
been no cross-industry mega-mergers under GLB.
It is, of course, possible that such mergers and even broader acquisitions of banks by
insurance and securities firms have been slow to occur because of fear of the heavy hand of
the Federal Reserve, despite pledges to be gentle by, and statutory restraints placed, on the
Fed. I do not think that fear of the hand of the Fed--heavy or otherwise--has been

significant, but I will not reject it outright. In addition, at least on the insurance side, there
have been some necessary lags while insurance companies convert from mutual to stock
form to facilitate their acquisitions of and by other firms. But it seems to me that fears of an
aggressive Federal Reserve or changes in corporate form do not explain the slowness of
banks to reach out across industry lines. These entities are used to Fed umbrella supervision
and seem comfortable with it, and though their stock prices have declined, the purchasing
power of their equities in an acquisition is still considerable.
I continue to believe that the modest pace of financial restructuring can be explained by
institutions’ taking the time to choose the businesses, markets, and structures that best fit
their individual strategies. And, perhaps most important, many of the “new” activities had
already been possible to banking organizations through various means, from section 20 to
section 4(c)8, to the Small Business Investment Company, to the town of 5,000 insurance
loophole, and so forth. The financial and banking revolution has always been more of an
evolution. The genius of GLB is that it created a structure that will permit and channel that
evolution for many years to come without the cost of seeking ways around the rules. But
when GLB was passed, no backlog of new business concepts just lay in wait for the legal
shackles to be broken; markets and deregulation had already moved financial organizations
pretty much to where they wanted to be.
What Has Been Done
GLB requires several instances of joint rulemaking and study. Let me start with a couple of
examples that I can cover without much discussion. One is the Treasury-Federal Reserve
non-capital regulations on merchant banking, which covered everything from the scope of
merchant banking activities to holding periods to permissible involvement in management.
Proposed last March, these rules were adopted in final form at the end of last year. The
blending of the expertise and focus of the two agencies, in both the policy and the regulatory
senses, created, I believe, an excellent final product--again one that fully meets the
congressional intent but that could not have been written by a legislative body.
The GLB called for two studies. The first directed the Fed to evaluate the performance and
profitability of loans made in conformance with the Community Reinvestment Act (CRA).
Board staff surveyed the largest 500 retail banking institutions and published the results last
July. The study found that CRA-related lending was generally profitable but, for many
institutions, less profitable than their other lending activities. Delinquency and default rates
were typically similar to, or somewhat higher than, those of other loans.
The second study--conducted jointly with the Treasury--considered the feasibility and
desirability of a mandatory subordinated debt policy for systemically important depository
institutions and their holding companies. The report on this study was submitted to the
Congress in late 2000, almost five months ahead of the congressional deadline. The study
found that subordinated debt issuance by large depository institutions may encourage market
discipline and generate other supervisory benefits, and it indicated that the Federal Reserve,
the Office of the Comptroller of the Currency, and the Office of Thrift Supervision will
consider ways to enhance their use of voluntarily issued subordinated debt in supervisory
monitoring. Although the Federal Reserve and the Treasury chose not to recommend that
the Congress make subordinated debt issuance mandatory at this time, the report indicated
that research and evaluation of such a policy would continue.
Now let me turn to several other implementation actions in somewhat more detail.

Merchant Banking Capital
GLB required the Federal Reserve and the Treasury jointly to write the rules on merchant
banking but the responsibility for capital charges for this activity fell to the Fed. This
experience turned out to be an educational one for us, in the best sense of the word.
The merchant banking capital rule is a case study in the benefits of the public comment
system. Regulatory agencies have their ideas and concepts vetted and challenged by the
process, and I believe that as a result we developed a better and more workable capital rule-a rule we proposed last month. I am not naïve enough to believe that self-serving public
comments are always better or more insightful than those of staff members or policymakers.
But in this case, public comments led us to fundamentally review our approach, and I think
the resulting proposed marginal capital charge better addresses the treatment of risks added
by the increasing equity holdings at banking organizations.
The new proposal is superior in another way. Very early in our review we recognized that
the safety and soundness risks of equity holdings were the same regardless of the legal entity
or the authority used. Though we began by considering the merchant banking authority, this
risk concern quickly led us to consider all the other equity holdings--in Small Banking
Investment Companies, under section 4(c)6, under section 24, and under Regulation K--as
well. These considerations, and the views of our sister agencies, induced us to invite them to
join us in developing joint interagency rules. I must say that the process was productive and
creative, and I was struck by the high degree of cooperation and professionalism throughout.
The resulting joint proposal by the Federal Reserve, the Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation is, in my judgment, an
improvement on the original proposal. It carves out (or exempts) and therefore gives
preferential treatment to equity investments in SBICs up to 15 percent of Tier 1 capital.
Otherwise--with the exception of some holdings under section 24--it applies the same
charge to all equity investments in nonfinancial companies held under these various
authorities regardless of where held. Finally, the capital charge increases with the
concentration of equity investments to tier 1 capital, beginning for non-SBIC investments
with an 8 percent charge up to 15 percent of tier 1 capital and reaching a 25 percent charge
for all equity investments in nonfinancial firms above 25 percent of tier 1 capital. In its own
way, the joint proposal is another model for the kind of interagency cooperation required by
GLB, a cooperation that leads to a better and stronger financial system.
One of the more passionately debated issues in the law was the extent to which any financial
institution, not just a bank, could share information about its customers with unrelated third
parties. GLB requires that all financial institutions tell customers what information will be
shared both with affiliated and with unrelated third parties. An institution may choose not to
share information about its customers with either group, but GLB provides that, if the
organization does share information with non-affiliates, consumers must be given the option
to exempt themselves from such sharing.
Now, most of this audience is composed of lawyers, and I assume, it comes as no surprise to
you that translating these seemingly straightforward congressional instructions into
regulations--to be jointly written by the Treasury, Fed, OCC, FDIC, OTS, National Credit
Union Administration, Securities and Exchange Commission, and the Federal Trade
Commission--was, at best, an interesting exercise and, at worst, a nightmare.

The resulting initial effort was just that: our best start. Obviously, despite the fact--or maybe
because of the fact--that we had an auditorium full of folks working on this, we could not
predict every privacy issue or answer every question that might be raised by the myriad of
privacy policies employed by the private sector. So, we'll revisit it over time and refine the
rule as we gain experience.
One of the major benefits of having developed this rule on an interagency basis is the
simplified compliance burden for organizations that have entities subject to the privacy rules
of different agencies. For example, a financial holding company that owns a national bank, a
thrift, a securities broker, and a finance company would have entities subject to the privacy
rules of the Fed, the OCC, the OTS, the SEC, and the FTC respectively. Because the agency
rules are virtually identical in all key respects, those affiliated companies may use the same
opt-out and disclosure forms if they all have the same privacy policies.
An interesting side note on the privacy provisions of GLB is that they cover an expanding
universe. The GLB applies the privacy rules to any "financial institution." That may sound
like a banking term, but the GLB actually defines a "financial institution" to be any
institution engaged in activities that have been determined to be financial in nature under the
Bank Holding Company Act. There is no requirement that the company be a bank or be
affiliated with a bank. As a result, every time the Fed and the Treasury determine that an
activity is financial in nature and therefore a permissible activity for a financial holding
company, a side-effect is that the privacy rules cover a new industry. For example, all
securities brokers and dealers--even those that are not affiliated with a bank or thrift--are
covered by the privacy rules because securities brokerage and dealing has been determined
by the GLB to be financial in nature. This is an example of the Congress using one part of
the GLB to do double duty to ensure that customers of like companies receive the same
privacy protections, regardless of whether or not the company is affiliated with a bank.
CRA and “Sunshine”
One of the more difficult assignments the GLB handed to the banking agencies--one of the
hot potatoes I referred to earlier--was development of the regulatory language to implement
the so-called “sunshine” provisions of the CRA: the provisions require public disclosure of
financial transactions between banking organizations and people and groups who discuss,
with the organization or the agencies, CRA performance of the organization’s insured
depository institutions. The difficulty is that the legislation is quite specific in places and, as
I noted last year to this group, ambiguous if not conflicting in others. This difficulty, in turn,
reflected hard bargaining and compromises among legislators. There might well have been
no new law if the parties’ intent had to be unambiguously clear or, worse, if lawmakers had
written the implementing regulations themselves.
As might be expected when the OCC, FDIC, Fed, and OTS took pencil to paper, there were
occasional disagreements about what the Congress intended. Again, the public comments
were useful. Commenters from the banking industry as well as commenters representing
consumer groups were surprisingly in agreement on a number of issues. We also received
useful comment from several members of the Congress.
Most commenters thought the agencies had gotten the disclosure and reporting provisions
just about right--that is, they provided the amount of sunshine that was needed. There was
also a fair amount of agreement that the agencies needed to better define exactly what the
sun would shine on! Of course, this is where the statute was most opaque. In the end, the

rule clarifies what types of CRA contacts are covered, who is covered, and when covered
CRA contacts occur. These changes focus the sunshine more than the original proposal.
Somehow, however, I don't think it's gotten us out of the heat. The reaction to our final rule
so far has been rather subdued, and it's likely that some time will be needed to see how well
the new rule works.
New Activities and Banking and Commerce
One of the places where the specificity in the legislation creates uncertainty is the
intersection of constraints on banking and commerce, on the one hand, and the expansion of
new activities on the other. The Congress specifically rejected commerce and banking in
GLB but empowered the Federal Reserve and the Treasury to add to the permissible
activities list any activity that is either “financial,” without much guidance as to what that
means, or is “complementary” to financial activities, with no guidance. A “complementary”
activity, by the way, is not a financial activity, but it must both be related to financial
activities and impose no substantial safety-and-soundness risk to depository institutions or
the financial system.
Now, this approach is both brilliant and frustrating. It creatively and pragmatically permits
the Federal Reserve, as I noted in my introductory remarks, to respond to evolving market
trends and technology without requiring the drawn out and always lagging process of
amending statutes in response to market developments. But, at the same time, the legislation
lists as explicitly permissible virtually all the activities that today are widely considered to
be financial, while empowering the agencies to define as “financial,” “incidental to
financial,” or “complementary to a financial activity” any new activity, with the constraint
not to mix “banking and commerce.” Put another way, perhaps in plainer English, GLB
grants the agencies authority to move toward mixing banking and commerce at the margin
as markets and technology begin to dim the already less than bright line between them. And
it gives virtually no guidance on how to do so.
This is, as a result, no easy task. Nevertheless, we have already begun carefully and
deliberately to exert that authority, in keeping with clear congressional intent. Authorizing
FHCs to act as a “finder” between buyers and sellers of goods and services was an easy first
step, since national banks were already empowered to do so. But in response to requests, we
have asked for public comment on proposals to authorize as “financial” or “complementary”
activities such as real estate agency, real estate management, expanded data processing, and
development of new technologies for the delivery of financial products.
In requesting that the Fed authorize these activities, FHCs offered their own rationales for
why these activities are “financial in nature,” “incidental to a financial activity,” or
“complementary to a financial activity.” Some FHCs boldly argued that, on the one hand,
anything done by a financial holding company or anything that includes processing a
payment is intrinsically financial. Those approaches lead to no distinction at all between
banking and commerce. On the other hand, simply allowing activities already allowed for
banks is too limiting and undoes the change in standards that the GLB tried to make.
These first proposals will allow the Fed to explore various rationales for finding activities to
be “financial,” “incidental to a financial activity” or “complementary to a financial activity.”
How we'll come out is unclear at this point; we are still collecting public comments. But
what is interesting is that, because the GLB Act allows for a range of approaches, the exact
definition of each standard may, as a practical matter, be less important to banking

organizations. The “financial,” “incidental to financial,” and “complementary to a financial
activity” authorities provide a range of standards that stretch from clearly banking to clearly
commercial. Though we at the Fed must struggle to place each new activity in one of these
categories, FHCs will be concerned only that we fit the activity into some category. To be
sure, different procedural costs are associated with the different categories, but they are
relatively minor. In the end, the key is whether the activity is permissible. And in that, the
GLB has created a much more elastic framework than the previous Bank Holding Company
Act and should allow the activities of FHCs to grow with--and perhaps lead--developments
in the financial markets.
Qualification Standards for Foreign FHCs
The Congress, you may recall, required that foreign FHCs had to meet standards
“comparable” to domestic organizations. The quandary created by the desirability and
necessity to maintain competitive equity within the United States required some trade-off in
areas where foreign and U.S. standards differ. A key issue is that foreign banks typically
have no minimum home market leverage ratio while U.S. banks do. If “comparable” were
taken too literally, the Board found itself potentially denying FHC status to foreign banks
with high ratings because of these differences in U.S. and foreign regulatory capital rules,
and being accused of imposing U.S. rules on foreign regulatory authorities.
To deal with these differences, the Board last March adopted an interim rule that established
a two-tier process. First, if a foreign bank's capital ratios met the threshold levels on a riskbased and leverage basis, the foreign bank was presumed to meet the regulation’s wellcapitalized standard. If one or more of the foreign bank’s capital ratios did not meet the
screening level, the foreign bank could use a pre-clearance process to request a
determination by the Board that the foreign bank had capital comparable to that of a wellcapitalized U.S. bank.
In the comment period on this interim rule, foreign banks objected to use of the leverage
ratio even as a screening device. After review of the comments and based on the Board’s
experience with the interim rule’s pre-clearance process, the Board decided to eliminate the
leverage ratio from the screening test for foreign banks.
In making comparability determinations, the Board will consider such factors as the market
ratings of the long-term debt issued by the foreign bank, the foreign bank’s leverage ratio,
the composition of the foreign bank’s capital, other measures of the financial strength of the
foreign bank, and, of course, the views of the home country supervisor of the foreign bank.
This approach achieves comparability among banking organizations without penalizing
foreign banks for their natural response to their own home country supervisor’s capital
requirements or allowing foreign banks an advantage over U.S. banking organizations that
must meet the U.S. leverage ratio.
This Board decision represented, I submit, a template of how to reach the intent of the
Congress--competitive equity--while adjusting to international institutional differences. Put
differently, it is an example of the application of agency expertise to fulfill congressional
direction. Large U.S. banks, I might add, were in full support of this decision, both on equity
grounds and in hope that the template I spoke of would be applied by the Europeans and
others to U.S. bank activities abroad in similar cases.
Umbrella Supervision and Interagency Cooperation

As I mentioned both in my introductory remarks and in my comments last year, the GLB
confirmed the Federal Reserve as the umbrella supervisor of BHCs and FHCs. However, it
explicitly limited the Fed’s role as umbrella supervisor reflecting concerns of securities and
insurance firms that might become FHCs, and their functional regulators. The former were
concerned about the intrusiveness of a regulator with a different historical responsibility and
focus than they were used to, and the latter about the undermining of their authority. Briefly,
the act limited the authority of the Fed to examine, impose capital requirements on, or obtain
reports from those subsidiaries of FHCs that are also regulated by the SEC or the state
insurance agencies. The role of the consolidated supervisor continues to be as the monitor of
holding company risks that could affect the health or viability of affiliated banks.
The Federal Reserve has initiated several efforts to enhance interagency cooperation,
consistent with both the letter and the spirit of the GLB. The act calls for the Fed and the
other agencies to cooperate on supervision and in some cases requires joint rule- and
decision-making. I have already noted the merchant banking regulations and capital rules,
the CRA sunshine regulations, and the joint privacy regulations. Now I would like to discuss
other efforts.
The Fed has aggressively sought ways to facilitate the sharing of crucial information
concerning bank examination and other matters with the SEC and the state insurance
regulators. We share information through writing formal memoranda of understanding
(MOU) with the functional regulators. The Fed has worked out the provisions of the
insurance-related MOU with the National Association of Insurance Commissioners, which
is acting on behalf of fifty-five state and territorial insurance commissioners and is now in
the process of getting these agreements signed. The Fed is also working with the SEC to
develop an MOU covering the sharing of information about broker-dealers in FHCs. In the
meantime, while we await the completion of the MOUs with the insurance and securities
regulators, agency staffs have worked out arrangements to ensure that critical information is
shared on a case-by-case basis.
Besides the formal MOU arrangements, the Fed works continuously to improve its working
relationships with other supervisors and to ensure maximum efficiency. For example, in
May 2000, the Fed and the OCC developed and implemented a pilot program outlining
practical operating arrangements for situations in which both agencies are involved in
supervising individual large complex banking organizations (LCBOs). Within this
framework, staff members from both agencies met to share supervisory strategies and
examination plans and to coordinate supervisory actions for 2001. The general agreement
that the agency supervisory teams will rely on each other’s existing work whenever
possible, reflects both the letter and spirit of GLB. Working cooperatively, the agencies will
assess their coordination at several LCBOs to learn from their relationships and to improve
The bilateral relationships between different supervisors are obviously critical, but as the
umbrella supervisor for FHCs, the Federal Reserve is in a unique position to facilitate
multilateral relationships among supervisors. To this end, the Federal Reserve has hosted,
and will continue to host, periodic cross-sectoral meetings for multiple supervisors to
discuss issues relevant to various financial industries. These meetings are useful for building
cooperation and improving each agency’s understanding of the different supervisory
authorities and objectives.

As these efforts and programs, as well as the recent joint merchant banking capital rules
indicate, we believe that GLB requires communication, cooperation, and coordination
among the banking agencies, the SEC, and the state regulators. This matter is not only one
of congressional intent. It is a necessity for effective supervision and regulation of the small
number of increasingly large, complex banking organizations. If, for whatever reason, we do
not cooperate, the financial system may be put at risk.
What is Left to be Done
The Fed has not yet acted on one significant area, but plans to do so this spring: sections
23A and B. Sections 23A and B of the Federal Reserve Act limit the amount of funding that
may flow from an insured depository institution to its affiliates, require that such credits be
collateralized and require that all such funding be extended at market prices. These
provisions have become even more important vehicles for insulating insured entities from
the risks of ever-widening activities permitted by their affiliates and for limiting the use of
subsidized resources outside banking.
Next month we will begin collecting quarterly data on covered credit flows from bank
subsidiaries of all BHCs to their affiliates and their own subsidiaries. We have been working
to develop--and hope to publish this spring--a 23A and B regulation that incorporates new
GLB provisions as well as many of the past interpretations, including definitions and
This regulation will include provisions implementing the GLB measures that address
extensions of credits between a bank and its affiliates coming both from derivative
transactions and through intraday settlement and payments transactions. The deadline for
this part of the rules is May 2001. The challenge here is to implement the provisions of the
legislation in a way that protects insured depository institutions with minimal disruptions to
The challenges of implementing GLB will not end when 23A and B regulations, and the
rules now out for comment, are adopted in final form. The real challenge will be to continue
the interagency cooperation necessary to supervise and regulate the increasingly large and
complex banking organizations that GLB authorized and the market and technology are
creating. These entities are no longer banks, or securities firms, or insurance companies.
They are something different, and it will take all our skills and best intentions to reflect the
public interest in supervising them. The natural inclination of the agencies to protect and
expand their jurisdiction must be reined in if we are to retain the spirit of this important
Two other issues, it seems to me, will continue to challenge us. First, how should we
supervise FHCs that are not dominated by banks, those that have relatively modest banking
operations? Should they get the same prudential review as entities with large banking
interests, and if different, how can competitive equity be maintained? Second, as hinted in
my remarks, the Congress delegated considerable responsibility for adjusting the line
between banking and commerce. Where should it be sketched, if not drawn, and how should
it evolve over time?

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