Federal bank regulators are preparing to set banks straight on the issue of linking commercial loans to investment-banking business, or loan tying. There is a growing conviction at the Federal Reserve and the Office of the Comptroller that guidance to the nation's biggest banks is needed, a Fed spokesman confirmed last week, and it is now a question of how quickly it will happen. The core issue is just what Section 106 of the Bank Holding Company Act will let banks do. Outside sources were predicting that the guidance will hone in on where that line is to be drawn in future. The banks point out that at present, Section 106 does not ban tying if it is voluntarily entered into. And they argue the law says only if banks exact some "condition or requirement" for getting the loan (beyond routine banking services such as deposits) is tying illegal.
But there have been complaints. The bulge of speculation on Wall Street about loans tied to investment banking became intense after 2002 scandals destroyed the credibility of Street analysts. Issuers are no longer able to benefit from investment banking firms' analysts touting their issues. For some corporations, Street talk had it, the answer was cheap loans, thanks to the Gramm-Leach-Bliley Act, which permits merging of commercial and investment banking firms. Allegedly, the other side of it was that corporations that did not want to place securities could not get loans from banks with affiliated securities houses. A year ago, spurred by pressure from Capitol Hill where lawmakers were getting constituent mail on loan tying, the Fed and the OCC set up a "Special Targeted Review" to find out what was going on. "The staff has largely finished the Targeted Review," the Fed spokesman said last week. "The staff is now exploring the possibility of developing guidance on the subject of tying."
Some players in big banks are predicting the guidance will surface publicly even before the General Accounting Office on Oct. 6 responds to requests from two lawmakers with its own analysis of whether the banks are breaching the anti-tying statute. Also playing a part in bringing the subject of loan tying to a head this fall will be a hearing Senate Banking Committee Chairman Richard Shelby (R-ala.) plans to dig into whether the Gramm-Leach-Bliley Act went too far in letting commercial and investment banking firms affiliate. A Shelby spokesman said a hearing could be timed to coincide with the GAO report.
But commercial bankers are not dismayed about the coming guidance. "The statute is very complicated and applications of it are very complicated," said an executive at one of the leading commercial banks. The Fed and the courts have no problems with it. But John Dingell has a problem with it." Rep. John Dingell (D-Mich.), ranking minority member on the Energy and Commerce Committee, has been the main force in Washington pressing regulators to act against alleged loan tying. A year ago when banking officials said they knew of no tying, Dingell wrote back supplying a number of reported instances of the alleged conduct.