More Bank For Your Buck? - how the Gramm-Leach-Bliley Act will affects personal finance management - Industry Overview

Black Enterprise, May, 2000 by Jeffrey Mckinney

The overhaul of banking laws presents new opportunities and a series of challenges. Here's how these changes may affect you.

TWENTY YEARS AGO, LISA BOULDIN-CARTER COULD HAVE OPENED A SAVINGS OR CHECKING account at her local bank and walked away with a toaster under her arm. Ten years ago, she could have invested some of her bank savings in mutual funds. Today, the 48-year-old mother of two can go to her bank to buy life insurance.

Welcome to the financial supermarket of the new millennium, where you can do one-stop shopping at your local bank. Thanks to a new law that has recently gone into effect, it is now possible to get a mortgage, auto insurance, stocks, bonds and more from one source, your bank. Or, if you prefer, you can get the same services and products from your life insurance carrier or securities broker.

How does this financial environment differ from the past? Essentially, the lines among banks, insurance carriers and brokerage firms were clearly drawn by the 1933 Glass-Steagall Act, which blocked the three industries from selling each other's products. It was created in light of the stock market crash of 1929, which clobbered banks and securities companies and sparked the Great Depression. The idea was to keep banks from risking deposits by investing assets in securities. It also barred them from selling insurance products such as property and causality protection.

Now, however, those regulatory lines have been erased thanks to the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act), passed in November 1999, which repeals Glass-Steagall and allows financially related firms, such as banks, insurance and securities companies to sell each other's products and services. It also allows them to merge or acquire one another.

The Gramm-Leach-Bliley Act was passed after Wall Street and the banking, insurance and brokerage industries--led by banks--pumped millions of dollars into lobbying and political contributions. Their goal was to be able to sell more financial services with limited restrictions, creating new sources of revenues and boosting profitability.

The impact of the Gramm-Leach-Bliley Act may take as long as a year to be felt, say experts. Meanwhile, they agree that the act raises more questions than it answers: Will the law give investors more access to new financial vehicles or expose them to a slew of institutions with little expertise? Will banks, insurers and financial institutions hire specialists to service clients or stick to products that they already know? Will consumers benefit from a wealth of new choices or be bombarded by higher fees from a limited selection of financial institutions? How will African American banks fair in this new environment?

Some experts say the law could foster new partnerships that will enable black banks to better serve their customers and compete for mainstream clients. Others say the new law could mean the death of black banks.

In any case, BLACK ENTERPRISE has polled experts to analyze the promises and perils of the law and how it may have an impact on African American investors, consumers and banks.

Passing The Buck To Consumers

It won't be long before Bouldin-Carter's son and daughter--Brandon, a 23-year-old senior at Florida A&M University in Tallahassee, and Brooke, a 22-year-old student at the College of Mount Joseph in Cincinnati--will face their first financial frontier. She wants her children to work with a specialist to get, for example, the most attractive mortgage rate to buy their first homes or to buy sizzling stock so that their hard-earned money will grow.

"You have kids today coming out of school making $45,000 to $50,000 a year and they need to look at things like how to best invest their money [such as through] something that offers tax shelters, and ways to enhance their incomes," says Bouldin-Carter. "With the new law, it seems that these companies will have a lot of people who will be able to tell you a lot of stuff about everything," she says. "But as a consumer, I want one person who spends all day just focusing on one thing to clearly and specifically explain what's best for me."

Some industry insiders argue that consumers like Bouldin-Carter will benefit from the fact that the new law gives them greater choices. Consumers want the best rates, easy access and convenience. One-stop shopping provides all of those options, says Judith Knight, director of the Center for Community Development at the American Bankers Association in Washington, D.C., the industry's largest trade group. She adds that consumers still have the option to buy banking, insurance and investment services separately and from various sources.

Proponents of the law also claim that merging banks, insurance companies and investment firms will mean lower-priced services, a greater choice of products and more convenience because of their vast operations. This could help consumers decrease their outlay by $15 billion annually, according to the U.S. Department of the Treasury.