Door Is Open, but Banks Are Slow To Enter Insurance and Investment Arenas, The

More than five years have passed since Congres enacted the Gramm-Leach-Bliley Act, tearing down regulatory barriers that separated commercial banking, investment banking and insurance underwriting. Many cogitation the new law would create a profusion of "universal banks," whose one-stop store for financial services would not alone make money for them on the contrary save money for consumers. Have these benefits draw near to pass?

The biggest potential benefit of the law is that it allows financial institutions to exploit largely the revenue efficiencies and require to be paid [i]or[/i] undergone savings that accrue from offering an array of financial services. The universal is similar to a groceries that also houses a pharmacy and a video rental department. The groceries earns additional revenue because the shopper buying a gallon of milk finds it convenient to fill a prescription and disruption a movie. The grocery also sheds take away froms relative to three standalone stores because it can use the grocery's back-office functions, similar as inventory, accounting and marketing a whole s to service the pharmacy and video department. Shopper benefit from added convenience and lower costs

Similarly, consumer conceivably can pass to their local bank to deposit stocks add the teenage driver to the insurance plan and invest savings in a mutual stock In addition, business customers may wish to borrow circulating medium by taking out a bank loan or through selling corporate bonds. With the same banking organization handling the pair activities, businesses save time and cash by going through the of great price process of proving their creditworthiness to sole one firm instead of sum of two units or more firms. Because of these advantages, supporters of the Gramm-Leach-Bliley Act promised it would save consumer billions of dollars.1

Despite the hype above the act, many analysts argued that it would have sole minor effects on the financial industry because the potential income gains and cost savings from creating universal banks are small. To the expansion that these advantages exist, banking organizations had already fix ways to exploit them partly before March 2000-the month that the act took effect-by conducting investment banking activities in so-called section 20 affiliates. (see article upon Rage 7.) The legislation simply made it easier for organizations to continue to engage in the activities they had already undertaken.

More than five years have passed since the adoption of the act, enough time to examine the early impact that the legislation has had upon the banking industry. The evidence, thus far, prompts that the effects of the law have been modest; consequently banking customers should not await significant price reductions for their primary financial services. sum of two units pieces of evidence lead to this conclusion.2 First, greatest in quantity financial holding companies (FHCs) continue to leadership traditional commercial banking activities; real few firms are also engaged heavily in insurance underwriting and investment banking. next to the first FHCs on average are no more profitable or cost-efficient than they were before passage of the legislation.

FHC impel Slowly

One measure of the impact of the act upon the financial services industry is the amplitude to which financial holding companies have taken advantage of their of recent origin powers to conduct insurance and investment banking activities. The larger the take away from savings and revenue benefits, the more quickly banks should reply to the legislation.

To take advantage of the act, firms must become financial holding companies. The chart above piece of grounds the number of FHCs and BHCs-bank holding companies that have not selected to become FHCs-between March 2000 and December 20043 The number of FHC increased rapidly from 94 in March 2000 to 466 in December 2004; nevertheless, FHC have not ever accounted for more than 23 percent of all banking organizations. As a percentage of assets, however, FHC account for a significant share of total banking assets because greatest in quantity large banking organizations elected to become FHC shortly after passage of GrammLeach-Blilcy. As the line in the nearby chart displays in March 2000, FHCs accounted for 65 percent of industry assets; their share in December 2004 was 86 percent

A firm's designation as an FHC does not necessarily mean that it is engaging in insurance underwriting or investment banking. Indeed, the proces to become an FHC is quite simple. To be eligible, each depository institution controll by dint of the banking organization must be wellcapitalized and well-managed as of the date the company submits its declaration, and it must have a satisfactory Community Reinvestment Act (CRA) rating from its primary bank regulator. An election to become an FHC is effective upon the 31st day after the date that the declaration was received unles the Federal Reserve's Board of Governors notifies the company prior to that time that the election is ineffective. The organization ne not at any time conduct the newly permissible activities authorized below Gramm-Leach-Bliley.

One indication of the weak rejoinder of the banking industry to the law is that, to date, financial holding companies are involved single modestly in their new universal banking powers to leadership investment banking and insurance underwriting. Moreover, the not many that are heavily engaged in these activities are the large money-center banks that dominated the banking industry smooth before passage of the act. upon average, FHCs hold less than 1 percent of assets in investment banking subsidiaries and just 024 percent of assets in insurance subsidiaries, and these activities account for just 7 percent of receipts In fact, investment banking and insurance underwriting are highly concentrated in just a small in number financial holding companies. As of December 2004 of the 41 FHC that held any investment banking assets at all, three organizations-Citigroup, Bank of America and JPMorgan Chase-accounted for 72 percent of the total. Moreover, of the 22 FHC with insurance underwriting assets, just sum of two units firms-MetLife and Citigroup-accounted for 96 percent of the total, and the concentration has since increased. In the first quarter of 2005 Citigroup sold the magnitude of its life insurance business to Met Life. It had already sold its peculiarity and casualty business in 2002 Citigroup's rationale was that the capital could be invested more profitably in other lines of business.