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 liberate the financial industry to some degree. The law allows companies working in the financial sector to integrate their operations, invest in one another's businesses, and consolidate. This incorporates businesses, for example, insurance companies, brokerage firms, investment dealers, and commercial banks.

Understanding the Financial Services Modernization Act of 1999

This legislation is otherwise called the Gramm-Leach-Bliley Act, the law was enacted in 1999 and eliminated a portion of the last limitations of the Glass-Steagall Act of 1933, what separated commercial banking activities from investment banking. At the point when the financial industry started to battle during economic slumps, allies of deregulation contended that whenever allowed to collaborate, companies could lay out divisions that would be productive when their fundamental operations endured slowdowns. This would help financial services firms stay away from major losses and terminations.

Prior to the enactment of the law, banks could utilize alternate methods to get into the insurance market. Certain states made their own laws that conceded state-sanctioned banks the ability to sell insurance. An interpretation of federal law likewise allowed national banks to sell insurance on a national level in the event that it was finished from offices in towns with populaces under 5,000. The availability of these supposed side courses didn't urge many banks to exploit these options.

The law likewise impacted consumer privacy, by expecting that financial companies clear up for consumers if and how they share their personal financial information; it additionally required these companies to protect sensitive data.

Capacities Granted to Banks

The Financial Services Modernization of 1999 allowed banks, insurers, and securities firms to begin offering each other's products as well as to affiliate with one another. As such, banks could make divisions to sell insurance policies to their customers and insurers could lay out banking divisions. New corporate structures would should be made inside financial institutions to oblige these operations. For instance, banks could form financial holding companies that would incorporate divisions to conduct nonbanking business. Banks could likewise make auxiliaries that conduct banking activities.

The space the law conceded to form auxiliaries to give extra types of services incorporated a few limitations. The auxiliaries must stay inside size imperatives relative to their parent banks or in absolute terms. At the hour of the enactment of the law, the assets of auxiliaries were limited to the lesser of 45% of the consolidated assets of the parent bank or $50 billion.

The law included different changes for the financial industry, for example, requiring clear revelations on their privacy policies. Financial institutions were required to inform their customers what nonpublic information about them would be shared with outsiders 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 seen as a contributing factor to the financial crisis of 2008 and following Great Recession. By wiping out the denial against the consolidation of deposit banking and investment banking, enacted under Glass-Steagall, the Gramm-Leach-Bliley Act straightforwardly uncovered traditional deposit banking to the risky and speculative practices of investment banks and different 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 whole financial system during 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 reestablished under the [Dodd-Frank Wall Street Reform and Consumer Protection Act](/dodd-forthcoming financial-administrative reform-bill) in 2010.

Features

• Like a bank holding company, a FHC is an umbrella organization that can claim auxiliaries engaged with various parts of the financial industry.
• The law revoked 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 begin offering each other's products, as well as to affiliate with one another.
• A structure expected to exist to house these new auxiliaries, which prompted the creation of the financial holding company (FHC).
• The Financial Services Modernization Act — or the Gramm-Leach-Bliley Act — is a law passed in 1999 that to some extent liberates the financial industry.