The Federal Reserve has a chance to fix one of the most paradoxical laws in America: the bank anti-tying law. It is less known but more insidious than the antitrust tying laws so famously aimed at Microsoft.
It's time for the Fed to either eliminate the anti-bundling rule altogether or roll it back. Either approach would be consistent with the modernization of antitrust laws currently under way. The Antitrust Modernization Commission set up by President Bush has been considering a variety of ways to reform antitrust laws. American banks will become more competitive in world markets and consumers will receive more efficient financial packages if federal banking regulators rescind the law's outdated "bundling" provisions.
Bundling, or tying, is the practice of providing customers with incentives to purchase multiple products together. A popular consumer example of bundling is a McDonald's Happy Meal: For one price, you get the toy, the burger, fries and a drink.
In the banking business, bundling can mean offering a loan with the purchase of another financial product: for example, a home loan with home insurance. This makes economic sense for banks and customers alike: Once a bank has incurred the cost of assessing a customer's credit, it shouldn't have to repeat the process for other products and can therefore offer additional products more cheaply.
But before a bank bundles products, it must comply not just with two antitrust statutes, the Clayton Act and the Sherman Act, but also the 1970 amendments of the more obscure Bank Holding Company Act. Bank tying restrictions were originally intended to protect consumers from banks thought to have undue market power over retail customers. But policymakers should be asking whether the law makes sense today.
Bank bundling restrictions not only forbid banks from forcing customers to buy any non-traditional banking product (such as investments) together with a traditional banking product (such as a loan), but they even prohibit inducing a customer to buy such products together by lowering the price.
In the last decade, a number of private parties have sued banks, alleging various violations of anti-tying provisions under the antitrust laws, from tying stock purchases to bank loans to requirements to have a bank account in order to cash a check. In most cases, judges have had the good sense to throw the cases out of court. It's a waste of judicial and legal resources.
In contrast, in 2003, the Fed, under the banking laws, fined the German bank WestLB AG $3 million for tying investment banking services to loans to large corporate clients.
The excessively broad bank tying law needlessly restricts American banks from competing in the world economy. It's the worst of the nation's anti-tying laws.
The bank law was intended to protect small and powerless retail customers from pressure by big banks to purchase products that they, the customers, don't want. This once had broad populist appeal, but is of dubious value in a competitive marketplace. By "protecting" consumers, the law denies everyone the benefits of cost savings from bundling. Economists cite several efficiency-enhancing reasons why companies bundle: lower transaction costs, economies of scope and quality control.
Even the Department of Justice, enforcer of the antitrust laws, believes this is a bad law. Commenting on the Fed's proposed guidelines, it has noted that since the banking laws only apply to banks and not other financial institutions, the laws could actually lessen competition and harm consumers. They shield non-bank financial institutions from competition from banks.
The benefits of this law are difficult to see. The DOJ sees no reason the banking law should extend beyond the anti-tying provisions of the antitrust laws. Commenting on the banking law's overreach to corporate customers, the DOJ wrote, "We see no evidence that large borrowers such as syndicated loan borrowers need additional assistance beyond the antitrust laws to protect themselves from anti-competitive tying."
Eliminating the bank tying provisions would be the Fed's best option. The second best would be to roll back the restriction so that it doesn't affect a bank's sophisticated corporate customers, who don't need protection.
It has often been argued that antitrust law should have the objective of encouraging competition and efficient performance from the economy. This banking law doesn't do that.
It's time to untie banks from this red tape.
