Financial Modernization Legislation In The United States. Background And Implications

The Gramm-Leach-Bliley Financial Modernization Act went into effect in the United States in1999. The Act establishes a new framework for affiliations among commercial banks, insurance companies and securities firms through "financial holding companies" and "financial subsidiaries", and establishes guidelines for entry into merchant banking. It moves financial institutions in the United States towards a system of conglomeration that has long existed in continental Europe and elsewhere in the world. This paper reviews important provisions of the new law, provides some comparisons with other countries, and draws some implications for future developments. The immediate effects of the law are not likely to be great, either in the United States or elsewhere. With respect to the integration of financial activities, it merely supports recent trends. At the same time, it requires a continued "separation of banking and commerce", precluding the establishment of true universal banks. Longer-run effects are likely to be more important. If the past is a guide to the future, whatever lines are now drawn by law and regulation between financial and commercial activities are likely to erode in the coming years.