Gramm Leach Bliley Act – Definition

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The Gramm-Leach-Bliley Act of 1999 Definition

The Gramm-Leach-Bliley Act of 1999 (GLBA), also known as Financial Modernization Act of 1999, was passed by Congress on 12 November 1999 under President Bill Clinton. The act was aimed at the modernization of the financial industry and control the ways by which financial institutions deal with the private information of individuals.

A Little More on the Gramm-Leach Bliley Act

The GLBA is widely known as the repeal of the Glass-Steagall Act of 1933, which separated commercial banking with investment banking. As a par too the Act, commercial banks were prohibited from offering financial services as part of their regular operations due to extraordinary losses by the banking industry during the 1929 Great Depression.

The Glass-Steagall Act was originally passed to protect bank deposits from risks associates with investments by the commercial banks. As a result of this Act, the commercial banks were not legally allowed to act as brokers for many years. The GLBA was introduced to allow the commercial banks to offer a wider range of products and services.

GLBA was passed upon merger of commercial bank Citicorp with the insurance firm Travelers Group — leading to formation of the multidimensional Citigroup, which offered insurance services along with commercial banking and security business. This merger ran afoul of the Glass–Steagall Act; however, the merger was permitted by the U.S. Federal Reserve and a waiver was given to the Citigroup. This merger paved the way for GLBA to legalize such mergers moving forward.

The Gramm-Leach-Bliley Act and Consumer Privacy

The Gramm-Leach-Bliley Act consists of three sections:

1. The Financial Privacy Rule, which controls the collection and disclosure of private financial information for the financial institute and the customers.

2. The Safeguards Rule, which mandates the financial institutions to implement adequate security programs to protect customer’s financial information.

3. The Pretexting provisions, which prohibit the access of customer’s private information using false methods.

The Act also requires financial institutions offering loans, financial or investment advice, and insurance to supply customers with written privacy warnings and information on sharing practices. The institution must also give an option to “Opt-out’ of sharing of their sensitive information, as per their free will. This is aimed at curbing the sharing of critical customer information (like bank balances and account numbers), which were being traded by banks and other financial institutions such as credit card companies.

References for Gramm-Leach Bliley Act

Academic Research on the Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley act, information privacy, and the limits of default rules, Janger, E. J., & Schwartz, P. M. (2001).  Minn. L. Rev., 86, 1219.  This article seeks to examine the shortcomings of the GLB Act through the law of incomplete contract. The key concerns here include information sharing and background rules when ensuring all gaps in an agreement are filled. There are three possible defaults when filling a contract; information forcing, norm enforcing and majoritarian. Through this article you will find out that the privacy policies provided by GLB Act are not reliable. Our proposal is that few revisions be done to the existing ‘opt-out and notice’ according to the GLB Act. We use social science research to improve this requirement when it comes to the power of ‘frames’.  Finally, we look into the possible advantages of a shift in the opt-in necessity.

The Gramm‐Leach‐Bliley Act of 1999: Risk implications for the financial services industry, Akhigbe, A., & Whyte, A. M. (2004). Journal of Financial Research, 27(3), 435-446. This journal seeks to document the negative implications of passing the Gramm‐Leach‐Bliley Act of 1999 in the financial sector. The risk facing the banking industry will be increased whether they invest in the banking industry or not. Insurance companies are the other casualties of this act, their risk is also increased. Security firms, however, will experience a decrease in the risk.  The increase in the risk for insurance and security firms is attributed to the security business is riskier compared to the two industries. Security firms on the other hand can diversify to the less risky insurance and banking businesses whenever there is a decline in the security firms’ risks.

The Wealth and Risk Effects of the Gramm‐Leach‐Bliley Act (GLBA) on the US Banking Industry, Mamun, A., Hassan, M. K., & Maroney, N. (2005). Journal of Business Finance & Accounting, 32(1‐2), 351-388. The Gramm‐Leach‐Bliley Act (GLBA) of 1999 signified an error of oppressive acts like Bank Holding Company Act of 1956 and the Glass‐Steagall Act of 1933. The two acts prohibited banks from insurance underwriting business and securities. This article seeks to find out the positive welfare impacts of this law. The banking industry has two major categories; Money Center banks and Super Regional banks. In comparison, Money Center banks with more than 20 subsidiaries benefited more from this Act. Systematic risks associated with this banks significantly decreased. Therefore, it is fair to say that GLBA played a major role in suppressing the possible risks. Larger banks are likely to benefit more, however the comparative profitability power is not conclusive.

 Banking and insurance: before and after the Gramm-Leach-Bliley act, Broome, L. L., & Markham, J. W. (1999). J. Corp. L., 25, 723. This article seeks to explain the growth history and the regulatory structure of insurance companies in the United States of America. The writer explains the involvement of financial institutions in the banking industry. This is after the passage the Gramm-Leach-Bliley Act of 1999 opened the door for banking institutions to venture into the insurance business. However, banks cannot compete fairly with the financial insurance companies because of the GLB Act. The article looks at the situation of bank insurance after the passage of Gramm-Leach-Bliley Act and whether this Act is the best method of regulating financial products.

The impact of the Gramm-Leach-Bliley act on the financial services industry, Al Mamun, A., Hassan, M. K., & Van Lai, S. (2004). Journal of Economics and Finance, 28(3), 333-347. This paper examines the impact of Gramm-Leach-Bliley Act across three main sectors of the financial services industry: commercial banks, insurance companies, and brokerage firms, taking account of the wealth effect associated with the announcement. We find that the law has a differential impact across the financial services industry. All three industries have gained due to this law with commercial banks benefiting most, followed by the insurance industry. Further, the results show that larger firms benefited more in both the banking and insurance industries and exposure to systematic risk was reduced for all sectors of the financial services industry after this regulation passed.

The gramm-leach-bliley act, Cuaresma, J. C. (2002). The gramm-leach-bliley act. Berkeley Tech. LJ, 17, 497.

The effect of the Gramm-Leach-Bliley Act on the insurance industry, Neale, F. R., & Peterson, P. P. (2005).  Journal of Economics and Business, 57(4), 317-338. Here we look into the Gramm-Leach-Bliley evolution and its effect in the insurance industry.  Another issue that we look into is the expansion in the shareholder wealth in the insurance industry as a whole. The journal also attempts to document the decline in the risk associated with the Gramm-Leach-Bliley Act. It is also important that we show the type of companies that have benefited most from this act. They are no notable change in the concentration of the insurance companies despite consolidation concerns about the Act from banking industry.

From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act, Omarova, S. T. (2010). NCL Rev., 89, 1683. In this article we examine the impact of section 23A of the Federal Reserve Act. Section 23A remains an obscure statute despite its official endorsement. The purpose of this article is to look for ways of effectively implementing the important parts of section 23A. It also looks into the letters from the Board of Governors of the Federal Reserve System between 1996 and 2010. The argument here is section 23A failed to deliver to its earlier promise. Its ineffectiveness became clear between 2007 and 2009 after it failed to solve the financial crisis that hit the world. Under this law, commercial banks went scot free with many malpractices. Despite few amendments of this law Dodd-Frank Act of 2010, the fundamental issues were not ironed out. The conclusion of this article focuses on the financial regularity reforms in the future.

·An Examination of the Equity Market Response to The Gramm‐Leach‐Bliley Act Across Commercial Banking, Investment ,Banking, and Insurance Firms, Yildirim, H. S., Kwag, S. W., & Collins, M. C. (2006).  Journal of Business Finance & Accounting, 33(9‐10), 1629-1649. The article focuses on wealth impacts following the events of the Gramm‐Leach‐Bliley Act of 1999 passage. It also paints the picture of the pre and post Act periods for financial institutions and insurance firms.  Compared to commercial banks, insurance firms and investment banks are in better position to utilize the legislation that allows for diversification.

·       Banking, commerce and competition under the Gramm-Leach-Bliley act, Shull, B. (2002). Banking, commerce and competition under the Gramm-Leach-Bliley act. The Antitrust Bulletin, 47(1), 25-61.

·       The Gramm-Leach-Bliley Act and Financial Integration, Furlong, F. T. (2000). The Gramm-Leach-Bliley Act and Financial Integration. FRBSF Economic Letter.

·       The Impact of Convergence and the Gramm-Leach-Bliley Act on the Insurance Industry, Faucette, D. P. (1999). The Impact of Convergence and the Gramm-Leach-Bliley Act on the Insurance Industry. Geo. Mason L. Rev., 8, 623.

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