Skip to main content

Bank Tying: Additional Steps Needed to Ensure Effective Enforcement of Tying Prohibitions

GAO-04-3 Published: Oct 10, 2003. Publicly Released: Oct 20, 2003.
Jump To:
Skip to Highlights

Highlights

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.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of the Comptroller of the Currency Distinguishing lawful and unlawful tying depends on the specific facts and circumstances of individual transactions. Because the facts, if any, that would suggest a tying violation generally would not be found in the loan documentation that banks maintain and because bank customers have been unwilling to file formal complaints, effective enforcement of section 106 requires an assessment of other indirect forms of evidence. Therefore, the Federal Reserve and the OCC should consider taking additional steps to ensure effective enforcement of section 106 and section 23B, by enhancing the information that they receive from corporate borrowers. For example, the agencies could develop a communication strategy targeted at a broad audience of corporate bank customers to help ensure that they understand which activities are permitted under section 106 as well as those that are prohibited. This strategy could include publication of specific contact points within the agencies to answer questions from banks and bank customers about the guidance in general and its application to specific transactions, as well as to accept complaints from bank customers who believe that they have been subjected to unlawful tying.
Closed – Implemented
An OCC release on March 23, 2004 provided specific contact points within OCC to (1) address questions regarding the tying provisions and their application to specific transactions and (2) accept complaints from bank customers. The release noted that the designation of the contacts was in response to GAO's recommendation.
Board of Governors Distinguishing lawful and unlawful tying depends on the specific facts and circumstances of individual transactions. Because the facts, if any, that would suggest a tying violation generally would not be found in the loan documentation that banks maintain and because bank customers have been unwilling to file formal complaints, effective enforcement of section 106 requires an assessment of other indirect forms of evidence. Therefore, the Federal Reserve and the OCC should consider taking additional steps to ensure effective enforcement of section 106 and section 23B, by enhancing the information that they receive from corporate borrowers. For example, the agencies could develop a communication strategy targeted at a broad audience of corporate bank customers to help ensure that they understand which activities are permitted under section 106 as well as those that are prohibited. This strategy could include publication of specific contact points within the agencies to answer questions from banks and bank customers about the guidance in general and its application to specific transactions, as well as to accept complaints from bank customers who believe that they have been subjected to unlawful tying.
Closed – Not Implemented
In April 2004, Federal Reserve officials said that they were continuing to revise its draft interpretation of section 106, and was considering further assessment of loan pricing issues. As of June 2009, it did not appear that, as a result of these considerations, the Federal Reserve had taken the additional steps suggested in the recommendation.
Board of Governors Because low priced credit could indicate a potential violation of section 23B, the Federal Reserve should assess available evidence regarding loan pricing behavior, and if appropriate, conduct additional research to better enable examiners to determine whether transactions are conducted on market terms and that the Federal Reserve publish the results of this assessment.
Closed – Not Implemented
A June 2009 review of Federal Reserve examination guidelines and published studies indicated that this recommendation was not implemented.

Full Report

Office of Public Affairs

Topics

Bank examinationBank loansBank managementBanking lawBanking regulationInsured commercial banksLaw enforcementNoncomplianceInvestment banksBorrower indebtedness