United States General Accounting Office

GAO Report to Congressional Committees

May 1997 BANK OVERSIGHT

Few Cases of Tying

Have Been Detected

GAO/GGD-97-58

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-261747 

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.

1

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
B-261747 

Background When Congress passed the Bank Holding Company Act Amendments of

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

affiliates.4

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

2

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.

3

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.

4

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
B-261747 

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

arrangement.

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.

5

See Integon Life Ins. Corp. v. Browning, 989 F.2d 1143, 1150 (11th Cir. 1993).

6

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
B-261747 

Figure 1: Share of U.S. Financial

Intermediaries’ Assets

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

35

21

11

22

8

2

0 0

25

9

10

25

16

10

4

1

Percentage

Banks

Thrifts

Pensions and

 insurance

GSEs and their

 pools

Mutual funds

 Asset-backed

securities and issuers

Brokers and

 dealers

Other sectors

Decrease in share of assets Increase in share of assets

1980

1994

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

7

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
B-261747 

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

power.

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.

Results in Brief We found limited evidence of tying activity by banks. Federal Reserve and

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

8

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
B-261747 

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.

Objectives, Scope,

and Methodology

The objectives of our review were to provide information on (1) evidence

of violations of the tying provisions by banks and their affiliates and

Page 6 GAO/GGD-97-58 Tying Provisions
B-261747 

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

9

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
B-261747 

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.

10We 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
B-261747 

Evidence of Tying by

Banks Has Been

Limited

We found little evidence of tying by banks. Agency officials we

interviewed were aware of only one instance of a tying violation identified

during regulators’ routine examinations of banks or inspections of bank

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

Revealed Few Tying

Abuses

During routine examinations, both OCC and Federal Reserve examiners are

expected to evaluate a banking organization’s compliance with the tying

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,

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B-261747 

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

practices.

Regulators’ Investigations

of Complaints Revealed

Few Tying Abuses

Examiners told us that specific complaints filed with the regulatory

agencies were the most effective means of detecting tying violations.

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.

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Table 1: Resolution of Tying

Complaints Received by the Federal

Reserve and OCC From January 1990

Through September 1996

Resolution

Federal

Reserve OCC Total

Action against the bank or holding company

Administrative action 3 3

Unfounded

After investigation 2 3 5

By the court 1 1 2

Unresolved

On appeal 1 1

Pending investigation 1 1

Othera 1 1

Total 6 7 13

aOne case was never resolved because the bank closed before OCC could follow up on

allegations.

Source: Federal Reserve and OCC.

Regulators’ Special Tying

Investigation Found One

Violation

A 1992 complaint by SIA prompted the Federal Reserve and OCC to launch a

special investigation of tying abuses that ultimately identified one 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

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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

provisions.

Litigation Results Did Not

Indicate Tying Was a Major

Problem

Our review of legal literature and cases shows that private claims of

unlawful bank tying have been relatively infrequent and that the courts

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

Groups Disclosed Little

Evidence of Tying, but

Industry Sources Differed

on Reasons

Our discussions with representatives of various groups, including state

regulators, academic experts, small business trade organizations, and

firms identified as possible sources by SIA, produced little evidence of tying

practices by banks. For these discussions, we selected insurance groups,

small business trade organizations, and chambers of commerce that we

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

11Bernard Shull, Tying and Other Conditional Agreements Under Section 106 of the Bank Holding

Company Act: A Reconsideration, The Antitrust Bulletin, Winter 1993.

12In 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
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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.

Securities and

Insurance Industry

Representatives Most

Concerned About

Tying Viewed Banks

as a Threat to Their

Market Share

The extent of concern about tying varied within the insurance and

securities industries. Industry groups that were most concerned about

tying by banks included independent insurance agents, who expressed the

greatest concern, and some insurance and securities firms that viewed

banks as a threat to their share of the market. Representatives of firms and

agents that expressed concern about tying advocated maintaining or

strengthening the tying provisions, which they said help offset banks’

competitive advantages and ensure adequate consumer protection.

Insurance and Securities

Representatives Favor

Maintaining or

Strengthening Tying

Measures as Banks

Diversify

Insurance industry representatives we contacted who said tying was a

problem were generally concerned about the ongoing expansion of bank

services into insurance. One such representative expressed particular

concern about the tying of various common types of insurance policies

easily linked to bank customers’ preexisting bank-related business.

Potential markets she cited included the profitable markets of automobile

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
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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

creditors.

Concerns About Market

Concentration for Some

Products in Local Markets

Although some viewed overall credit market changes occurring since 1980

as an indication that banks may now be less able to engage in

anticompetitive tying practices than when the tying provisions were

adopted, others, including insurers, securities firms, and academic

13Functional 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
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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.

Bank Representatives

Viewed Tying

Provisions as Limiting

Banks’ Ability to

Compete

Banking industry officials we contacted believed that marketplace

changes since the passage of the tying provisions over 25 years ago have

significantly reduced the original economic justification for the tying

provisions. The officials said that the provisions have been made largely

unnecessary by increased competition among credit providers in the

financial marketplace. This increased competition, they said, makes it

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

the Tying Provisions

Several bank representatives we contacted expressed a desire to have

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

14Lawrence 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
B-261747 

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
B-261747 

Views of Bank

Regulators on the

Need for the

Provisions

In response to our questions about the need for the tying provisions, OCC’s

official view emphasized the importance of the provisions that prohibit

banks from conditioning the availability of one product on the purchase of

another, while the Federal Reserve chose not to provide an official

position. OCC observed that the tying provisions increase banks’ awareness

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.

Agency Comments The Federal Reserve, OCC, and FDIC reviewed a draft of this report and

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
B-261747 

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
Contents

Letter 1

Appendix I 

Comments From the

Federal Reserve

System

22

Appendix II 

Comments From the

Office of the

Comptroller of the

Currency

23

Appendix III 

Comments From the

Federal Deposit

Insurance

Corporation

24

Appendix IV 

Major Contributors to

This Report

25

Table Table 1: Resolution of Tying Complaints Received by the Federal

Reserve and OCC From January 1990 Through September 1996

11

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

Abbreviations

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

System

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

General Government

Division, Washington,

D.C.

David P. Tarosky, Senior Evaluator

Mitchell B. Rachlis, Senior Economist

Dallas Field Office Jeanne M. Barger, Project Manager

Ellen G. Thompson, Evaluator

San Francisco Field

Office

Abiud A. Amaro, Evaluator

Gerhard C. Brostrom, Communications Analyst

Office of the General

Counsel, Washington,

D.C.

Paul G. Thompson, Attorney

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