Corporate Access to Credit

STATUS
During a Senate Banking Committee hearing on July 13, 2004, Chairman Shelby (R-AL) and Senator Sarbanes (D-MD) asked James McLaughlin, Director of Regulatory and Trust Affairs for the American Bankers Association, about bank tying practices. The Senators cited AFP's 2004 Credit Access Survey as evidence that banks are tying credit access to investment banking. Additional Senate hearings on GLB oversight are expected next year. On August 25, 2003, the Board of Governors of the Federal Reserve System issued a "proposed interpretation and supervisory guidance with request for public comment" on the anti-tying restrictions in section 106 of the Bank Holding Company Act (BHCA). The proposal is an attempt to clarify what constitutes permissible tying and what is impermissible or prohibited. The Fed makes it clear that there are instances where tying arrangements would not violate section 106 of the BHCA. These transactions are specifically exempted from section 106 either by law or regulation. A final interpretation has not yet been issued.

BACKGROUND
The Banking Act of 1933, often referred to as Glass-Steagall, restricted commercial banks from dealing in and holding corporate securities. Over time, the federal bank regulatory agencies modified the restrictions on commercial banks. In 1999, Congress passed the Gramm-Leach-Bliley Act (GLB), which repealed important sections of Glass-Steagall. Under GLB, commercial banks are able to combine with investment banks and insurance companies to form financial holding companies. Now, banking organizations could again sell their corporate clients both credit and investment banking services.

AFP's ACTIONS
AFP conducted three surveys exploring this important issue. Each survey showed that:

• there is increasing pressure to award other banking services in exchange for credit.
• commercial banks require or strongly encourage companies to grant other financial business to gain short-term credit.
• many companies expect adverse consequences from not awarding business to short-term credit providers.
• the practice of banks tying credit to the purchase of other services, especially investment banking, remains widespread.

AFP has met with the Federal Reserve and the National Association of Securities Dealers (NASD), and Congressional staff about this important issue.

On September 30, 2003, AFP submitted comments on the Fed’s proposal (see above) calling for additional clarification.

In June 2003, AFP sent letters to the Fed and U.S. Department of Justice (DOJ) opposing the DOJ’s suggestion that the protections contained in the BHCA apply only to small businesses.