RELATED WEB SITES Gramm–Leach–Bliley Federal Reserve Board request for public comment on proposed rule Testimony of Governor Laurence H. Meyer on real estate brokerage activities

Money and Banking
Banks as Real Estate Brokers—Letting Free Enterprise Work

Karen Couch, Robert Mahalik and Robert R. Moore look at a proposal that would open real estate brokerage and management to banks.

A proposal that would open real estate brokerage and management to banking organizations has generated a maelstrom of controversy, as evidenced by the tens of thousands of comment letters and e-mails that have deluged the Federal Reserve Board.

The legislation underlying the regulatory proposal is the Gramm–Leach–Bliley Act, which, in 1999, authorized a platform upon which the next generation of financial institutions would be built. Gramm–Leach–Bliley would permit banking organizations to provide real estate brokerage and management services if the regulatory agencies determine that those services are financial in nature, incidental to a financial activity, or complementary to a financial activity.

Necessary in Order to Compete
One compelling argument in favor of the proposal is that real estate brokerage may have become a necessary activity for banks to compete effectively with other companies that provide bundled financial services. Gramm–Leach–Bliley expands significantly the agencies’ capacity to consider the competitive realities of the financial marketplace in determining an activity’s permissibility. Since other non-bank providers of mortgage financing offer real estate brokerage services, it could be argued that banks are at a competitive disadvantage by being prohibited from offering consumers the convenience of one-stop financial shopping as well.

Consumers Benefit
In our free-market economy, business firms are generally at liberty to decide for themselves the scope of activities in which they participate. Successful expansion into a new activity rests on synergies between the new activity and existing ones. These synergies may come on the production side from shared fixed costs, for example, or on the demand side from the convenience of one-stop shopping.

While banks have not had the same freedoms other businesses have to choose additional business lines, Gramm–Leach–Bliley provides a way for them to move closer to becoming full-service financial providers. If banks can combine products and services in a way that creates value for their customers at a reasonable cost, bank expansion into the new arena will be profitable. If, however, the new activity turns out to be unprofitable, banks would likely retreat from it. Without regulatory restrictions, the market will determine whether a new activity is a worthwhile venture for banks.

Entry barriers, such as those imposed by the old banking regulations, reduce competition, thereby allowing prices to climb higher than what would otherwise prevail. Hence, should the proposed real estate activities be approved for banks, the primary beneficiary of the heightened competition would be the consumer.

A Highly Competitive Market
For many years, consideration of expanded bank participation in real estate activities has been stymied by concerns that it may lead to a highly concentrated and, therefore, less competitive financial industry. However, market forces do much to allay these concerns. Today’s market is highly competitive, not only because of the sheer number of firms, but because advances in technology and the removal of geographic branching restrictions have given banks new opportunities to do business in remote locations.

The Gramm–Leach–Bliley provisions that allow banks to move into nontraditional business lines can benefit consumers by providing additional choices and reducing impediments to competition among various financial service providers. Given the opportunity, free enterprise works for banks, too.

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