Financial Services Modernization Act of 1999

What Is the Financial Services Modernization Act of 1999?

The Financial Services Modernization Act of 1999 is a law that serves to partially deregulate the financial industry. The law allows companies working in the financial sector to integrate their operations, invest in each other’s businesses, and consolidate. This includes businesses such as insurance companies, brokerage firms, investment dealers, and commercial banks.

Key Takeaways

  • The Financial Services Modernization Act—or the Gramm-Leach-Bliley Act—is a law passed in 1999 that partially deregulates the financial industry.
  • The law repealed big parts of the Glass-Steagall Act of 1933, which had separated commercial and investment banking.
  • The law allowed banks, insurers, and securities firms to start offering each other's products, as well as to affiliate with each other.
  • A structure needed to exist to house these new subsidiaries, which led to the creation of the financial holding company (FHC).
  • Similar to a bank holding company, an FHC is an umbrella organization that can own subsidiaries involved in different parts of the financial industry. 

Understanding the Financial Services Modernization Act of 1999

This legislation is also known as the Gramm-Leach-Bliley Act, the law was enacted in 1999 and removed some of the last restrictions of the Glass-Steagall Act of 1933, which separated commercial banking activities from investment banking. When the financial industry began to struggle during economic downturns, supporters of deregulation argued that if allowed to collaborate, companies could establish divisions that would be profitable when their main operations suffered slowdowns. This would help financial services firms avoid major losses and closures.

Prior to the enactment of the law, banks could use alternate methods to get into the insurance market. Certain states created their own laws that granted state-chartered banks the ability to sell insurance. An interpretation of federal law also gave national banks permission to sell insurance on a national level if it was done from offices in towns with populations under 5,000. The availability of these so-called side routes did not encourage many banks to take advantage of these options.

The law also impacted consumer privacy, by requiring that financial companies explain to consumers if and how they share their personal financial information; it also required these companies to safeguard sensitive data.

Capabilities Granted to Banks

The Financial Services Modernization of 1999 allowed banks, insurers, and securities firms to start offering each other’s products as well as to affiliate with each other. In other words, banks could create divisions to sell insurance policies to their customers and insurers could establish banking divisions. New corporate structures would need to be created within financial institutions to accommodate these operations. For example, banks could form financial holding companies that would include divisions to conduct nonbanking business. Banks could also create subsidiaries that conduct banking activities.

The leeway the law granted to form subsidiaries to provide additional types of services included some limitations. The subsidiaries must remain within size constraints relative to their parent banks or in absolute terms. At the time of the enactment of the law, the assets of subsidiaries were limited to the lesser of 45% of the consolidated assets of the parent bank or $50 billion.

The law included other changes for the financial industry such as requiring clear disclosures on their privacy policies. Financial institutions were required to inform their customers what nonpublic information about them would be shared with third parties and affiliates. Customers would be given a chance to opt out of allowing such information to be shared with outside parties.

Financial Deregulation and the Great Recession

Financial deregulation under the Gramm-Leach-Bliley Act was widely viewed as a contributing factor to the financial crisis of 2008 and ensuing Great Recession. By eliminating the prohibition against the consolidation of deposit banking and investment banking, enacted under Glass-Steagall, the Gramm-Leach-Bliley Act directly exposed traditional deposit banking to the risky and speculative practices of investment banks and other securities firms.

Combined with the development and spread of exotic financial derivatives and the extreme (for the time) low interest rate policies of the Federal Reserve, this contributed to an environment of mounting systemic risk across the entire financial system in the 2000s leading up to the financial crisis of 2008. In the course of the Great Recession that followed, parts of the Glass-Steagall protections were reinstated under the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010.

Article Sources
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  1. Congressional Research Service. "Major Financial Services Legislation, The Gramm-Leach-Bliley Act (P.L. 106-102): An Overview," Pages 1-2. Accessed Oct. 29, 2021.

  2. North Carolina Banking Institute. "Gramm-Leach-Bliley Act and State Regulation of the Business of Insurance-Past, Present and Future," Pages 55-58. Accessed Oct. 29, 2021.

  3. U.S. Government Publishing Office. "Public Law 106-102," Sec. 502, Page 1437. Accessed Oct. 29, 2021.

  4. Board of Governors of the Federal Reserve System. "Bank Holding Companies and Financial Holding Companies." Accessed Oct. 29, 2021.

  5. U.S. Government Publishing Office. "Public Law 106-102," Sec. 121, Page 1373-1374. Accessed Oct. 29, 2021.

  6. Congressional Research Service. "Banking Policy Issues in the 116th Congress," Page 6. Accessed Oct. 29, 2021.

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