Bank Oversight: Few Cases of Tying Have Been Detected (Letter Report,
05/08/97, GAO/GGD-97-58).

Pursuant to a congressional request, GAO provided information on banks'
compliance with the tying provisions of the Bank Holding Company Act
Amendments of 1970, focusing on: (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 the Federal Reserve and the Office of the
Comptroller of the Currency (OCC).

GAO noted that: (1) it found limited evidence of tying activity by
banks; (2) Federal Reserve and OCC officials GAO interviewed were aware
of only one violation identified during routine bank examinations or
hold company inspections since 1990; (3) 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; (4) 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; (5) GAO's interviews with state regulators, small
business groups, and others identified little evidence of tying
violations, although it was 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; (6) those
representatives of securities and insurance firms and independent
insurance agents GAO contacted that expressed concern about tying
advocated maintaining or strengthening the tying provisions as a way of
offsetting the competitive advantages they believe banks enjoy; (7) some
industry representatives and academic experts interviewed said that a
more important consideration than the banking industry's share of the
credit market is the availability of credit; (8) bank industry
representatives viewed the tying provisions as impairing banks' ability
to maximize the economic benefits they might otherwise obtain by
offering complementary services; (9) 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; (10) 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; (11) 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; and (12) some regulatory staff expressed the bel*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-97-58
     TITLE:  Bank Oversight: Few Cases of Tying Have Been Detected
      DATE:  05/08/97
   SUBJECT:  Banking regulation
             Bank holding companies
             Antitrust law
             Credit
             Lending institutions
             Insurance companies
             Brokerage industry
             Banking law
             Consumer protection
             Bank examination

             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1997

BANK OVERSIGHT - FEW CASES OF
TYING HAVE BEEN DETECTED

GAO/GGD-97-58

Tying Provisions

(233474)


Abbreviations
=============================================================== ABBREV

  FDIC - Federal Deposit Insurance Corporation
  GSE - government sponsored enterprise
  OCC - Office of the Comptroller of the Currency
  SIA - Securities Industry Association

Letter
=============================================================== LETTER


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. 


   BACKGROUND
------------------------------------------------------------ Letter :1

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 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. 

   Figure 1:  Share of U.S. 
   Financial Intermediaries'
   Assets

   (See figure in printed
   edition.)

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
papers\7 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.\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. 


--------------------
\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. 

\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. 

\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. 

\8 NationsBank v.  Variable Annuity Life Insurance Co., 115 S.Ct. 
810 (1995); Barnett Bank v.  Nelson, 116 S.Ct.  1103 (1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

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 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
------------------------------------------------------------ Letter :3

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
regulators\9 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 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. 


--------------------
\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. 

\10 We 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. 


   EVIDENCE OF TYING BY BANKS HAS
   BEEN LIMITED
------------------------------------------------------------ Letter :4

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
---------------------------------------------------------- Letter :4.1

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, 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
---------------------------------------------------------- Letter :4.2

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. 



                                Table 1
                
                Resolution of Tying Complaints Received
                  by the Federal Reserve and OCC From
                  January 1990 Through September 1996

                                                Federa
                                                     l
                                                Reserv
Resolution                                           e     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
Other\a                                                      1       1
Total 6                                              7       1       3
----------------------------------------------------------------------
\a One 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
---------------------------------------------------------- Letter :4.3

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 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
---------------------------------------------------------- Letter :4.4

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


--------------------
\11 Bernard Shull, Tying and Other Conditional Agreements Under
Section 106 of the Bank Holding Company Act:  A Reconsideration, The
Antitrust Bulletin, Winter 1993. 

\12 In 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). 


      STATE, LOCAL, AND TRADE
      GROUPS DISCLOSED LITTLE
      EVIDENCE OF TYING, BUT
      INDUSTRY SOURCES DIFFERED ON
      REASONS
---------------------------------------------------------- Letter :4.5

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 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
------------------------------------------------------------ Letter :5

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
---------------------------------------------------------- Letter :5.1

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 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. 


--------------------
\13 Functional 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. 


      CONCERNS ABOUT MARKET
      CONCENTRATION FOR SOME
      PRODUCTS IN LOCAL MARKETS
---------------------------------------------------------- Letter :5.2

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
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. 


--------------------
\14 Lawrence 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. 


   BANK REPRESENTATIVES VIEWED
   TYING PROVISIONS AS LIMITING
   BANKS' ABILITY TO COMPETE
------------------------------------------------------------ Letter :6

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
---------------------------------------------------------- Letter :6.1

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 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. 


   VIEWS OF BANK REGULATORS ON THE
   NEED FOR THE PROVISIONS
------------------------------------------------------------ Letter :7

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
------------------------------------------------------------ Letter :8

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. 


---------------------------------------------------------- Letter :8.1

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




(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL RESERVE
SYSTEM
============================================================== Letter 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
============================================================== Letter 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
============================================================== Letter 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

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


*** End of document. ***