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. 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 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. 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. 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. 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. In response to the complaint, OCC and the Federal Reserve agreed to jointly investigate seven large bank holding companies and four large banks. 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. 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. 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. 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. 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.
Why GAO Did This Study

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).

What GAO Found

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 belief that the tying provisions may have a deterrent effect, but others believed increased competition in the marketplace makes it difficult for banks to force a borrower into a tying arrangement.