The Possible Consequences of Bank Entry into the Real Estate Brokerage Market: What the Research Tells Us

Abstract This article examines the extant literature on real estate brokerage to identify and assess the possible consequences of allowing financial holding companies and financial subsidiaries of national banks entry into the real estate brokerage market. Specifically, this study addresses three areas of concern: the effects of bank entry on competition within this market, the impact on market efficiency, and how entry may affect the type and quality of services provided to consumers. Given what is known about the nature of this market, the findings indicate that bank-provided real estate brokerage services should only be permitted if advocates can offer compelling evidence that the potential benefits outweigh the risks to the consumer. Introduction Should banks be allowed into the real estate brokerage market? This question is the subject of a debate that has been ongoing since the Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act (GLB Act), was passed in 1999. The bill was the culmination of lobbying by the banking and financial services community to eliminate the restrictions placed on the industry by the Glass-Steagall Act. The GLB Act basically acknowledged that the depression era restrictions on banking activities were obsolete and prevented banks and financial service companies from effectively competing in growing domestic and global markets. While the GLB Act did expand the range of activities in which banks could participate, it did limit national banks to "financial services" and forbids them becoming involved with "commercial" enterprises. They are also specifically prevented from engaging in real estate development and investment activities. Unfortunately financial services were never defined in the GLB Act, which left it to the Board of Governors of the Federal Reserve and the Department of the Treasury to determine the meaning of this term. Not surprisingly, banking industry advocates, such as the American Bankers Association and the Financial Services Roundtable, immediately sought to include real estate brokerage and property management within the definition of financial services. The National Association of Realtors, among others, has, also not surprisingly, objected, arguing the real estate brokerage is not a financial service, but rather a commercial activity and, therefore, should not be permitted under GLB. The period for public comment ended in the spring of 2001, but the debate continues. Depending on when and if the Treasury makes a ruling, further legislation may be in the offing, given that one side or the other is not satisfied with the outcome. It may take years to finally resolve this issue. Engaging in the semantic battle over whether real estate brokerage is a "financial" activity is quite probably a fruitless endeavor. Much less attention has been directed at what is arguably the far more important question: What will be the impact on the consumer if financial institutions are allowed into the real estate brokerage market? Will entry increase competition within this industry and result in more efficient allocation of resources and lower real estate brokerage commissions or, alternatively, lead to even greater concentration within the industry, a reduction in allocative efficiency, and higher fees and commissions? These are the some of questions this study seeks to address. The primary objective of this research is to identify and explore the possible consequences of bank entry into the real estate brokerage market. This article is not meant to be an exhaustive study of this issue, nor, necessarily, will it provide definitive answers to all of the questions posed above. Rather, it is intended to help readers assess whether the potential benefits of bank-provided real estate brokerage services outweigh the potential risks to the consumer. At the very least, this study should be food for thought for regulators and legislators contemplating whether or not to allow banks into this market. …