Proposed Cap On Complementary Activities Raises Hackles
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Proposed Cap On Complementary Activities Raises Hackles

A last-minute interpolation into the legislative history of the Gramm-Leach-Bliley Act by Rep.Jim Leach (R-Iowa) is creating another hassle between financial institutions and the Federal Reserve over what financial holding companies are allowed to do. In recent days, the Fed has been getting sharply worded complaints because the central bank wants to put an aggregate cap of only five percent of tier one capital on certain electronic activities it proposes allowing FHC's to do as "complementary" to financial.

The cap "appears to be totally arbitrary and raises many questions," said the Securities Industry Association in its Feb. 16 comment. If FHC's are to be truly competitive, wrote the New York Clearing House Association on the same date, there should be no cap, adding "we do not understand...how these activities create safety and soundness risks beyond those that exist in numerous fee-based activities that banks currently provide." The Fed had solicited comments on its proposal to allow the activities.

"Will this five percent cap apply only to all activities that are heretofore defined as complementary," asked SIA, "or will it just apply to three categories...enumerated in the present proposal?" If the former, the trade group added, and a financial institution invests up to the cap level in the current activities it "would not be able to invest in any new complementary activities that are authorized."

In public remarks Feb. 15 the Fed's general counsel, Virgil Mattingly, had emphasized the intent to use its complementary activity authority under GLBA in a flexible way. But he also said the 5% cap was in the proposal "because Leach had said complementary should be small relative to overall activity." Leach was then chairman of the House Banking Committee.

A spokesman for Leach said that on the night the House and Senate conferees approved the final version of the bill in October 1999 Leach had added language to say "it is expected that complementary activities would not be significant relative to the overall financial activities of the organization." Leach is a foe of the mixing of banking and commerce. The complementary activities part of the bill is intended to allow FHC's to do non-financial kinds of business.

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