Chapter 17 - Regulation of the Financial Institutions’ SectorAnswer:The Financial Services Modernization (Gramm-Leach-Bliley) Act was passed, permitting banks to affiliate with securities firms, insurance companies, and selected other types of businesses. This could be done by creating financial holding companies (FHCs) that own shares in all of the above businesses or through a subsidiary structure in which a bank or other financial firm operates securities firms and other subsidiaries. This law opened up the United States for the first time in more than half a century to universal or multidimensional banking. Surprisingly few financial-service providers rushed out to form FHCs right away—less than a fifth of the largest bank holding companies and a few securities houses, insurance companies, and smaller banking organizations—through 19 of the 20 largest U.S. banks currently belong to an FHC. Most financial institutions seem content with the organizational structures they already operate and many are waiting to see what the final rules for operating an FHC are going to look like in the future.
7. How will Gramm-Leach-Bliley affect the disclosure of financial information and the privacy rights of the customers of financial-service firms? Do you think additional legislation is needed in this field?
Answer: A “reverse disclosure” law appeared in the U.S. in 1999 under the label of the Financial Services Modernization (Gramm-Leach-Bliley) Act. This new set of government rules permits customers of selected financial-service providers to stop the sharing of their nonpublic personal information with other businesses, except that the customer must first contact his or her financial institution and indicate they do not wish their personal data conveyed to others (such as telemarketing firms). Otherwise, information sharing is generally permitted.The disclosure rules have aroused a storm of controversy. For most such rules, it is not clear that the benefits of greater disclosure outweigh the costs involved. For example, the U.S. Office of Management and Budget has estimated that U.S. bankers commit an average of at least 7.5 million hours each year just to comply with the Truth in Lending Act. Nor is it clear that the public pays much attention to these disclosure requirements, though the public does appear to pay an increasing amount of attention today to protecting its privacy, particularly when it comes to privacy protection for its personal financial and medical information.