Section 106 of the Bank Holding Company Act Amendments of 1970

Congress added section 106 to the Bank Holding Company Act in 1970 to  address concerns that an expansion in the range of activities permissible  for bank holding companies might give them an unfair competitive  advantage because of the unique role their bank subsidiaries served as  credit providers.Section 106 makes it unlawful, with certain exceptions,  for a bank to extend credit or furnish any product or service, or vary the  price of any product or service (the “tying product”) on the “condition or  requirement” that the customer obtains some additional product or service  from the bank or its affiliate (the “tied product”). Also, section 106  generally does not prohibit a bank from conditioning its relationship with a  customer on the total profitability of its relationship with the customer. According to the Board’s proposed interpretation, a bank can legally  condition the availability of a bank product, such as credit, on the  customer’s selection from a mix of traditional and nontraditional products  or services—a mixed-product arrangement—only if the bank offered the  customer a “meaningful choice” of products that includes one or more  traditional bank products and did not require the customer to purchase any  specific product or service. Some Corporate Borrowers Alleged That Unlawful Tying Occurs, but Available Evidence Did Not Substantiate These Allegations

Some corporate borrowers alleged that commercial banks unlawfully tie  the availability of credit to the borrower’s purchase of other financial  services, including debt underwriting services from their banks’ investment  affiliates. Although customer  information could have an important role in helping regulators enforce  section 106, regulators do not have a specific mechanism to solicit  information from corporate bank customers on an ongoing basis. Moreover, with few exceptions, complaints have not been brought to the  attention of the banking regulators. Because documentary evidence demonstrating unlawful tying might not be  available in bank records, regulators might have to look for other forms of  indirect evidence, such as testimonial evidence, to assess whether banks  unlawfully tie products and services. In response to recent  allegations of unlawful tying at large commercial banks, the Federal  Reserve and OCC conducted a special targeted review of antitying policies  and procedures at several large commercial banks and their holding  companies. The banking regulators  found that banks covered in the review generally had adequate controls in  place. Investment Affiliates of Commercial Banks Have Gained Market Share in Underwriting

In recent years, the market share of the fees earned from debt and equity  underwriting has declined at investment banks and grown at investment  affiliates of commercial banks. Further, as discussed in an earlier section, it is not clear that  commercial banks underprice loan commitments. Regulatory guidance has noted  that some tying arrangements involving corporate credit are clearly lawful,  particularly those involving ties between credit and traditional bank  products. Customers have a key role in providing information that is needed to  enforce section 106. However, the Federal Reserve and OCC have little  information on customers’ understanding of lawful and unlawful tying  under section 106 or on customers’ knowledge of the circumstances of  specific transactions. The Comptroller of the Currency and the General Counsel of  the Board of Governors of the Federal Reserve System replied that they  generally agreed with the findings of the report and concurred in our  recommendations.
Why GAO Did This Study

Investment affiliates of large commercial banks have made competitive inroads in the annual $1.3 trillion debt-underwriting market. Some corporate borrowers and officials from an unaffiliated investment bank have alleged that commercial banks helped their investment affiliates gain market share by illegally tying and underpricing corporate credit. This report discusses these allegations, the available evidence related to the allegations, and federal bank regulatory agencies' efforts to enforce the antitying provisions.

What GAO Found

Section 106 of the Bank Holding Company Act Amendments of 1970 prohibits commercial banks from "tying," a practice which includes conditioning the availability or terms of loans or other credit products on the purchase of certain other products and services. The law permits banks to tie credit and traditional banking products, such as cash management, and does not prohibit banks from considering the profitability of their full relationship with customers in managing those relationships. Some corporate customers and officials from an investment bank not affiliated with a commercial bank have alleged that commercial banks illegally tie the availability or terms, including price, of credit to customers' purchase of other services. However, with few exceptions, formal complaints have not been brought to the attention of the regulatory agencies and little documentary evidence surrounding these allegations exists, in part, because credit negotiations are conducted orally. Further, our review found that some corporate customers' claims involved lawful ties between traditional banking products rather than unlawful ties. These findings illustrate a key challenge for banking regulators in enforcing this law: while regulators need to carefully consider the circumstances of specific transactions to determine whether the customers' acceptance of an unlawfully tied product (that is, one that is not a traditional banking product) was made a condition of obtaining credit, documentary evidence on those circumstances might not be available. Therefore, regulators may have to look for indirect evidence to assess whether banks unlawfully tie products and services. Although customer information could have an important role in helping regulators enforce section 106, regulators generally have not solicited information from corporate bank customers. The Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) recently reviewed antitying policies and procedures of several large commercial banks. The Federal Reserve and OCC, however, did not analyze a broadly-based selection of transactions or generally solicit additional information from corporate borrowers about their knowledge of transactions. The agencies generally found no unlawful tying arrangements and concluded that these banks generally had adequate policies and procedures intended to prevent and detect tying practices. The agencies found variation among the banks in interpretation of the tying law and its exceptions. As a result, in August 2003, the Board of Governors of the Federal Reserve, working with OCC, released for public comment new draft guidance, with a goal of better informing banks and their customers about the requirements of the antitying provision.