[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31186]
Federal Register / Vol. 59, No. 243 / Tuesday, December 20, 1994 /
[[Page Unknown]]
[Federal Register: December 20, 1994]
VOL. 59, NO. 243
Tuesday, December 20, 1994
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0843]
Revisions Regarding Tying Restrictions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is adopting a final rule amending the anti-tying
provisions of Regulation Y to permit a bank holding company or its
nonbank subsidiary to offer a discount on its product or service on
condition that a customer obtain any other product or service from that
company or from any of its nonbank affiliates. Thus, the final rule
would generally remove Board-imposed restrictions on tying when no bank
is involved in the arrangement and the products are separately
available for purchase by the customer. The Board believes that the
amendment will relieve bank holding companies of a competitive
disadvantage, promote efficiency in the delivery of services, and
provide benefits for consumers.
EFFECTIVE DATE: January 23, 1995.
FOR FURTHER INFORMATION CONTACT: Gregory A. Baer, Managing Senior
Counsel (202/452-3236), or David S. Simon, Attorney (202/452-3611),
Legal Division; or Anthony Cyrnak, Economist (202/452-2917), Division
of Research and Statistics, Board of Governors of the Federal Reserve
System. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
Section 106(b) of the Bank Holding Company Act Amendments of 1970
(12 U.S.C. 1972) generally prohibits a bank from tying a product or
service to another product or service offered by the bank or by any of
its affiliates. A bank engages in a tie for purposes of section 106 by:
(1) Offering a discount on a product or service (the ``tying product'')
on the condition that a customer obtain some additional product or
service (the ``tied product'') from the bank or from any of its
affiliates; or (2) allowing the purchase of a product or service only
if a customer purchases another product from the bank or from any of
its affiliates. Although section 106 applies only when a bank offers
the tying product, the Board in 1971 extended section 106 to products
offered by bank holding companies and their nonbank subsidiaries. 12
CFR 225.7(a).
On July 27, 1994, the Board proposed an amendment to conform the
anti-tying provisions of Regulation Y more closely to section 106 and
its focus on banks. 59 FR 39709 (August 4, 1994). The proposed
amendment would permit bank holding companies and their nonbank
subsidiaries to offer discounts on packaged products when: (1) Both the
tying and tied products are offered by bank holding companies or their
nonbank subsidiaries--in other words, when no affiliated bank was
involved in the arrangement; and (2) both the tying and tied products
are separately available for purchase at competitive prices. If the
package arrangement included a product offered by an affiliated bank,
the proposed amendment would not apply (although the arrangement might
qualify for another exception adopted by the Board).
General Summary of Comments
The Board received 31 comments on its proposal. Those commenting
included 17 banking organizations, eight trade associations, and five
Reserve Banks. Commenters overwhelmingly supported the proposed
amendment. One banking trade association opposed the Board's proposal
because it believed that a blanket exception could have anti-
competitive effects in small towns. This commenter recommended that the
Board act on exemption requests on a case-by-case basis.
Discussion
The Board is adopting the amendment substantially as proposed. It
is important to note that the amendment is not an exception to section
106, which applies only when a bank offers the tying product--that is,
when a bank is varying the consideration or conditioning the
availability of a product in order to create an incentive for the
customer to purchase another product.1 The amendment will apply
only when nonbanks offer all of the packaged products--a case that
would otherwise be covered by the Board's extension of section 106 to
tying within a bank holding company organization.
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\1\The purpose of section 106 was to prevent banks from using
their market power over certain products to gain an unfair
competitive advantage in other products. See, e.g., S. Rep. No.
1084, 91st Cong., 2d Sess., 16 (1970). Although banks, like their
nonbank competitors, already were subject to general antitrust
prohibitions on tying, Congress concluded that special restrictions
were necessary given the unique role of banks in the economy.
Section 106's restrictions on banks are broader than those of the
antitrust laws, as no proof of economic power in the tying product
or anti-competitive effects in the tied product market are required
for a violation to occur.
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The amendment will not permit the types of anti-competitive
practices that the Board's regulatory extension was designed to
prevent. Neither bank holding companies nor their nonbanking
subsidiaries generally appear to possess sufficient market power in the
products that they offer to impair competition.2 Moreover, bank
holding companies and their nonbank subsidiaries will continue to be
restricted by the antitrust laws--the same restrictions that bind their
non-bank holding company competitors--and the Board will retain the
authority to terminate or modify any arrangement that resulted in anti-
competitive practices. Section 106 will continue to restrict tying by
banks, and Regulation Y will continue to restrict tying by a nonbank
when the tied product is offered by an affiliated bank. Finally, the
amendment will rescind Regulation Y's restrictions on tying between
nonbanks only where discounting is involved and the products are
separately available.
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\2\For example, the ``laundry list'' activities in which bank
holding companies and their nonbanking subsidiaries are permitted to
engage are generally conducted in competitive national or regional
markets that are characterized by large numbers of actual or
potential competitors and low barriers to entry. See 12 CFR 225.25.
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The final rule is further justified by the competitive environment
in which bank holding companies and their nonbank subsidiaries operate
nationwide. The amendment will relieve bank holding companies of a
competitive disadvantage, promote efficiency in the delivery of
services, and provide benefits for consumers. In particular, the
amendment will provide customers with greater choices and potentially
lower costs by allowing bank holding companies to offer the same types
of discounts that their competitors already offer.
Other Issues
The Board sought public comment on several particulars of the
proposed amendment, including: (1) The Board's requirement that all
products offered in a package arrangement be separately available for
purchase; (2) that these products be separately available ``at
competitive prices''; and (3) the Board's clarification that its
authority to revoke an exception that is resulting in anti-competitive
practices includes authority to halt such practices at an individual
institution.
Commenters were split on the proposed requirement that all products
in a package arrangement be separately available for purchase, with
five in favor and seven opposed. The requirement of separate
availability, like the requirement that the arrangement involve a
discount, effectively prevents a bank holding company from conditioning
the availability of one product on the purchase of another. In a
competitive market, a company should be unable to profit from such an
arrangement--as customers are free to purchase the desired, tying
product from a competitor without having to purchase the less desired,
tied product. Although, as noted, the markets for products offered by
bank holding company affiliates are generally competitive, there may be
a few markets that are less competitive, and the discounting and
separate availability restrictions would therefore act as a further
safeguard to protect against anti-competitive practices in such
markets. Accordingly, these requirements will be retained.3
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\3\ The proposed rule contained specific language emphasizing
that all products in a package arrangement must be separately
available for purchase by the customer. Because all anti-tying
exceptions granted by the Board already are subject to this
requirement, this language has been deleted in the final rule to
avoid redundancy. See 12 CFR 225.7(c)(1).
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Commenters generally opposed the addition of a clarifying phrase
providing that products be separately available ``at competitive
prices,'' with four in favor and seven opposed. The purpose of this
clarification was to prevent evasion of the separate availability and
discounting requirements. Such an evasion could occur by establishing
the price of a product so far above its package price that customers
would effectively be required to purchase the package in order to
obtain the product. The effect would be the same as an explicit
conditioning of the availability of the product, as described above.
Commenters expressed concern about the difficulties of determining
what constitutes a competitive price, particularly in products that are
unusual or unique. Because of these concerns, the Board has not adopted
this clarification but will continue to interpret ``separately
available'' to mean available at a price that would generally attract
customers and therefore leaves customers desiring a product a
meaningful choice between purchasing the product alone or through a
package.
Commenters did not object to the Board's retained authority to
revoke an exception that is resulting in anti-competitive practices or
the Board's ability to halt such practices at an individual
institution. The Board has retained such authority in the final rule.
Additional Relief Requested by the Commenters
Several commenters suggested that the Board grant additional relief
from the tying restrictions of section 106 and Regulation Y. In
particular, nine commenters recommended that the Board completely
repeal the extension of section 106 to bank holding companies and their
nonbank subsidiaries. Commenters also suggested that the Board extend
the proposed amendment to allow a nonbank subsidiary of a bank holding
company to offer a discount on a product or service to a customer who
purchases a product or service from a bank affiliate.
Seven commenters recommended revisions to the regulatory
traditional bank product exception recently adopted by the Board.4
The commenters requested that the Board extend the regulatory
traditional bank product exception beyond cases where only traditional
bank products are part of the package. These commenters noted that the
statutory traditional bank product exception permits a bank to tie any
product (not just a traditional bank product) to a traditional bank
product, and suggested that the same exception should apply to ties
between affiliates. Finally, several commenters requested that the
Board clarify the treatment of operating subsidiaries of banks under
section 106 and further expand the definition of traditional bank
products.
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\4\See 12 CFR 225.7(b)(1). Section 106 contains an explicit
exception (the ``statutory traditional bank product exception'')
that permits a bank to tie any product or service to a loan,
discount, deposit, or trust service (a traditional bank product)
offered by that bank. The regulatory traditional bank product
exception partially extends the statutory traditional bank product
exception by permitting a bank or any of its affiliates to vary the
consideration for a traditional bank product on condition that the
customer obtain another traditional bank product from an affiliate.
In other words, a bank may offer a customer a discount on one
product (e.g., a deposit account) if the customer obtains another
product (e.g., a loan) from an affiliate, so long as both products
are traditional bank products.
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The Board continues to analyze all of these issues and will
consider these proposals, and others, after the recent amendments have
been implemented.
Paperwork Reduction Act
No collections of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the
proposed rule.
Regulatory Flexibility Act
It is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities
that would be subject to the regulation.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set forth in the preamble, the Board amends 12 CFR
Part 225 as set forth below:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for 12 CFR part 225 is revised to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In Sec. 225.7, a new paragraph (b)(3) is added and paragraph
(c)(2) is revised to read as follows:
Sec. 225.7 Tying restrictions.
* * * * *
(b) * * *
(3) Discounts on tie-in arrangements not involving banks. A bank
holding company or any nonbank subsidiary thereof may vary the
consideration for any extension of credit, lease or sale of property of
any kind, or service, on the condition or requirement that the customer
obtain some additional credit, property, or service from itself or a
nonbank affiliate.
(c) * * *
(2) Any exception granted pursuant to this section shall terminate
upon a finding by the Board that the arrangement is resulting in anti-
competitive practices. The eligibility of a bank holding company or
bank or nonbank subsidiary thereof to operate under any exception
granted pursuant to this section shall terminate upon a finding by the
Board that its exercise of this authority is resulting in anti-
competitive practices.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 14, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31186 Filed 12-19-94; 8:45 am]
BILLING CODE 6210-01-P
