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. The prohibition, in Section 106(b) of the 1970 amendments, 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 Citing the competitive vitality of the markets in which nonbanking companies generally operate, the Board rescinded its regulatory extension of the statutory tying provisions to bank holding companies and their nonbank subsidiaries in February 1997.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. 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 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. 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. In the same period, several other financial sector participants, including mutual funds and government sponsored enterprises (GSE), increased their share of those assets. 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 papers 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 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. 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. The objectives of our review were to provide information on (1) evidence of violations of the tying provisions 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 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 regulatorsand 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 of products and services, which are believed to be susceptible to tying.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.