Banking and Commerce

OCE-97-3R: Published: Jun 10, 1997. Publicly Released: Jun 10, 1997.

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Jean G. Stromberg
(202) 512-3000


Office of Public Affairs
(202) 512-4800

Pursuant to a congressional request, GAO responded to questions concerning the issue of mixing banking and commerce.

GAO noted that: (1) it found no mention of any economic efficiencies that are unique to maintaining the separation of banking and commerce; (2) however, GAO found frequent references in the literature to the likelihood that maintaining the existing separation could be beneficial because it would mean less risk to the safety and soundness of insured depository institutions and to the financial system; (3) H.R. 10 would continue the holding company framework for nonbank activities, which the Board believes is important to limit the direct risk of new financial activities to banks and the safety net; (4) bank affiliations with mortgage banking firms, leasing companies, and securities firms do expand the federal safety net to some degree, and various statutory and regulatory firewalls and limits currently exist to reduce the risks posed by such activities to the safety net; (5) Sections 23A and 23B of the Federal Reserve Act may or may not be sufficient protection against the misuse of bank funds; (6) the Federal Reserve has suggested that certain regulatory firewalls may no longer be necessary, at least in part due to the presence of the firewall provisions contained in Sections 23A and 23B of the Federal Reserve Act; (7) it can be very difficult to determine whether a loan was made or credit extended in accordance with arm's length standards; (8) while currently there does not appear to be any general shortage of available credit in the economy, GAO's concern is with the potential difficulties that might arise if banks and commercial firms were allowed to merge, or that might exist in the future if current trends toward consolidation continue; (9) while firewalls and sanctions provide some level of protection against improper transactions, GAO work has shown that firewalls may not work in times of stress, or where managers are determined to evade them, and that violations have occured despite the potential for enforcement actions and substantial penalties; (10) the risk of contagion effects potentially applies to all affiliates of a financial services holding company; (11) the concern is that contagion risks could arise if the current separation were relaxed or eliminated; (12) the existence of deposit insurance reduces, but does not eliminate, the likelihood of a run on the deposits of a bank; and (13) according to some analysts, it is unclear that U.S. banks have been losing ground in terms of a relevant measure of market share.

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