The Gramm-Leach-Bliley Act addressed these changes in the financial sector. It was intended to promote the benefits of financial integration for consumers and investors while safeguarding the soundness of the banking and financial systems.
The primary change the law ushered in was the creation of a new kind of financial institution: the financial holding company FHC. A FHC was essentially an extension of the concept of a bank holding company—an umbrella organization that could own subsidiaries involved in different financial activities. This was something of a compromise, as security and insurance underwriting and sales by depository institutions would still be restricted, but banks could be part of a larger corporation that was involved in those activities.
The law placed cross-marketing restrictions to prevent a bank and a nonbank subsidiary of a FHC from marketing the products or services of the other entity. These restrictions were intended to prevent banks from promoting securities underwritten by other subsidiaries to their customers.
In addition, restrictions remained on financial transactions between banks and nonbank subsidiaries. In order to give these rules teeth, it was necessary to appoint a regulator that would have the power to enforce them. That responsibility fell primarily upon the Federal Reserve.
To form a FHC, a company must file a written declaration with the Federal Reserve Board that it elects to be a FHC, and must also certify that it meets the requirements. The certification requirements were intended to hold FHCs to a higher standard.
The subsidiary depository institutions must be well capitalized and well managed in accordance with existing bank regulations, and they must have at least satisfactory ratings under the Community Reinvestment Act. If any of the subsidiaries cease to be well managed or capitalized, the FHC would face corrective supervisory action and be prohibited from undertaking new financial activities until the problems were addressed.
FHCs have days to correct their shortcomings, or they could be forced by the Fed to divest their depository subsidiaries or stop engaging in other financial activities. When commencing an authorized financial activity, a FHC must notify the Federal Reserve Board within thirty days after starting the activity.
The Fed supervises the consolidated organization, while primarily relying on the reports and supervision of the appropriate state and federal authorities for the FHC subsidiaries. For example, the Securities and Exchange Commission would regulate the registered securities brokers, dealers, and investment advisers; state insurance commissioners would oversee licensed insurance companies; and the appropriate state and federal banking agencies would supervise banks and thrifts.
This role was seen as necessary because these large and complex financial institutions had risk spread across their subsidiaries, but managed it as a consolidated entity; someone had to oversee the operation of all the moving parts. Furthermore, the goal of the law was to protect banks and their customers from risks taken on at financial subsidiaries, while ensuring that the protections for banks e.
The financial crisis of has caused many to call into question how effectively the law carried out its goals. It is probably too early to answer definitively, but a few questions can be posed:. There is an active debate over these and other questions, and some have called for substantial changes to Gramm-Leach-Bliley.
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But it remains for future historians to answer these questions definitively. Furlong, Fred. Matthews, Dylan. Should you?
Understanding Gramm Leach Bliley in Order to Secure Consumer Personally Identifiable Information
Yeager, Timothy J. Yeager, and Ellen Harshman. Written as of November 22, See disclaimer. Related Links Text of Act.