Abstract
This Selected Issues paper focuses on the adoption of new technology and globalization in the United States of America, and assesses the change in the productivity growth and revised estimates, the developments in the labor market, equity prices, and the technology boom. The paper analyzes how the monetary policy influences economic conditions in emergency markets; reviews the developments in financial consolidation; discusses the key provisions contained in the Gramm-Leach-Bliley (GLB) Act, the implications of the GLB Act for financial consolidation, and regulatory and supervisory practices.
VI. U.S. Financial Sector Reform: The Gramm-Leach-Bliley Act1
1. The development of new financial products and services has increasingly blurred the characteristics that once distinguished banks, securities firms, and insurance companies from one another. At the same time, the previous banking legislation, rooted in Depression-era laws, restricted the ability of banks to underwrite and deal in securities, as well as engage in other nonbanking-type activities. Despite the laws, these restrictions were markedly eroded as various decisions were made to accommodate innovations in business practices.
2. Over the last 20 years, numerous efforts were made to modernize financial sector legislation to keep pace with the evolving market place, but these efforts were stymied by failure to reach agreement on legislation until the Gramm-Leach-Bliley (GLB) Act was enacted in November 1999. In particular, the Act repealed Section 20 of the Glass-Steagall Act of 1933 which had restricted affiliation between banks, securities firms, insurance companies, and other financial service providers, and modified the Bank Holding Act of 1956 to allow companies that own commercial banks to engage in any type of financial activity.2 This paper reviews recent developments in financial consolidation; discusses the key provisions contained in the GLB Act; and explores the implications of the GLB Act for further financial consolidation and regulatory and supervisory practices.
A. Recent Trends in Financial Consolidation
3. Since the 1970s, the role for commercial banks in providing credit to U.S. businesses has decreased markedly, as competing financial institutions and the securities markets have accounted for a growing share of business funding.3 By the mid-1990s, debt securities accounted for more than four times as much financing for U.S. corporations than did bank loans, whereas in most other industrial countries, bank loans were a much more important source of funding than debt (Figure 1).
International Comparison: Bank Loans and Debt Securities of Nonfinancial Firms, 1994
Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A006
Source: Berger, DeYoung, Genay, and Udell (2000).1 Liabilities equals bank loans (short- and long-term loans from depository instititutions) plus debt securities (short- and long-term bills, notes, bonds and debentures).4. Debt instruments in the United States have also become more marketable, as the proportion of corporate bonds issued in public markets rose to about 85 percent by the early 1990s from about 70 percent in the late 1960s. At the same time, the process of securitization—whereby loans on bank balance sheets are transformed into tradable securities—has also spread to a broader range of loan types since the 1970s, beginning first with mortgages, and then consumer and business loans. Securitization has meant that loans which originate with banks are sold off to mutual funds, pension funds, and other investors, with the result that a larger share of financial assets are held by nonbank intermediaries. Banks’ share of total assets held by financial intermediaries declined to about 24 percent in the late 1990s from about 37 percent in the early 1980s.
5. Consolidation in the banking industry has also been occurring at a rapid pace.4 During the 1990s, the number of U.S. credit insitutions declined by about 30 percent. As a result, the share of assets held by the five largest banks increased from about 9 percent to about 17 percent, although by comparison with most other industrical countries, concentration in U.S. banking remains low (Figure 2). Underlying these broad trends are structural changes within the U.S. banking industry. Although the number of mergers and acquisitions has declined by more than half from its peak in 1994, the number of “mega mergers”—that is mergers and acquisitions between institutions with assets over $1 billion each—has been on the rise.5 In contrast, bank failures have declined markedly during the 1990s, and as the banking sector’s profitability picked up in the mid-1990s, entry of new banks has risen. Consolidation is also underway in other segments of the financial services industry, however, to a far lesser extent than in banking. For example, compared to the late 1980s, the securities and life insurance sectors have become somewhat less concentrated, while the property-liability insurance sector has become more concentrated.
International Comparison: Banking System Concentration, 1990 and 1997 1/
Citation: IMF Staff Country Reports 2000, 112; 10.5089/9781451960297.002.A006
Source: Berger, DeYoung, Genay, and Udell (2000).1/ Measured as assets of the five largest institutions as a percent of total assets.6. Supporting U.S. financial consolidation over the last two decades were a number of ad hoc decisions relaxing some of the restrictions of the U.S. regulatory environment. For example, since the 1980s, the federal restrictions on interstate banking had eroded as states began to pass legislation which allowed the entry of out-of-state bank-holding companies through the acquisition of an existing bank. In an effort to catch up with the realities of interstate banking, the Riegle-Neal Act of 1994 eliminated most of the remaining impediments to interstate banking and branching. The restrictions that separated commercial banking from securities and insurance activities had eroded as well. In the late 1980s, the Federal Reserve allowed commercial bank-holding companies to participate in debt and equity underwriting on a limited basis through what were termed Section 20 affiliates.6
7. The GLB Act eliminates the remaining restrictions on affiliations between commercial banks and securities and insurance firms, and perhaps most importantly, eliminates the legal uncertainties, the need for special rulings and other barriers which have hindered financial services companies from offering various products and services.7 Rather than viewed as a sea-change in U.S. regulatory policy, the GLB Act modernizes the regulatory framework so that it more accurately reflects the current state of business practices in the financial services industry.
B. Key provisions of the Gramm-Leach-Bliley Act
8. The centerpiece of the GLB Act is the creation of a new “financial holding company” (FHC) structure (Table 1).8 A FHC is similar to a bank-holding company in that it satisfies certain new regulatory conditions, which include ensuring that the depository institutions are well capitalized and well managed.9 However, unlike bank-holding companies, a FHC is not required to secure prior approval from the Federal Reserve to engage in nonbanking financial activities. Instead, an “after the fact” notice must be filed within 30 days. Eliminating the need for prior approval will significantly reduce the regulatory burden.
United States: Key Provisions of the Gramm-Leach-Bliley Act
Although Section 20 of the Glass-Steagall Act prohibited banks from being affiliated with firms that are principally engaged in the underwriting of securities, the Federal Reserve had interpreted this regulation to allow banks to affiliate with firms that underwrite bank impermissible securities as long as this was not a substantial part of the affiliate’s business.
United States: Key Provisions of the Gramm-Leach-Bliley Act
| Prior to the Gramm-Leach-Bliley Act | Under the Gramm-Leach-Bliley Act |
|---|---|
| 1. Activities of Holding Companies | |
| Bank-holding companies (BHCs) could engage in nonbanking activities deemed to be closely related to banking under the Bank Holding Company Act of 1956, but only on a limited basis. A BHCs securities subsidiaries could derive up to 25 percent of revenue from underwriting and dealing in bank ineligible securities, subject to various firewalls set up by the Federal Reserve. 1/ BHCs were generally prohibited from underwriting most forms of noncredit-related insurance. | A new type of BHC—a financial holding company (FHC)—may engage in a broader range of financial activities that are outlined in the Act, determined by the Federal Reserve and in coordination with the Treasury to be financial in nature, or complementary. These activities include insurance and securities underwriting, merchant banking, and commercial investments made by insurance companies. No prior approval is required before an FHC begins to conduct these activities, but an after-the-fact notice must be filed with the Federal Reserve. However, before engaging in any of the new activities, all insured depository institution subsidiaries of the BHC must be well capitalized and well managed. |
| 2. National Banks | |
| National banks were not allowed to underwrite or deal in municipal revenue bonds. | Well-capitalized national banks and their subsidiaries may underwrite and deal in revenue bonds without limitations. |
| National banks were allowed to have operating subsidiaries engaged in activities permissible under the National Bank Act. National banks could also have “special” operating subsidiaries which engage in activities not permissible for the parent, but are still incidental to the banking business. | The authority of national banks to have operating subsidiaries is unchanged. However, national banks may also have “financial subsidiaries” that are engaged in financially related activities that national banks cannot conduct directly. Financial subsidiaries are not allowed to engage in insurance underwriting, real estate development investment, or merchant banking. |
| 3. Insurance | |
| National banks and their subsidiaries could provide insurance if the OCC determined that the activity was a part of or incidental to banking. Generally this restricted insurance underwriting activities to credit-related insurance. | National banks and their subsidiaries may not provide insurance products; title insurance (except under certain conditions) and underwriting annuities are also prohibited. |
| 4. Savings and Loan Holding Companies | |
| Savings and Loan holding companies that controlled no more than one saving association were not subject to any statutory restrictions on business activities such as those imposed on multiple saving and loan companies (unitary thrift” loophole). | The “unitary thrift” loophole is closed and no company can acquire control of a savings association unless the company is engaged only in activities currently authorized for multiple thrift holding companies; or activities permissible for FHCs. |
Although Section 20 of the Glass-Steagall Act prohibited banks from being affiliated with firms that are principally engaged in the underwriting of securities, the Federal Reserve had interpreted this regulation to allow banks to affiliate with firms that underwrite bank impermissible securities as long as this was not a substantial part of the affiliate’s business.
United States: Key Provisions of the Gramm-Leach-Bliley Act
| Prior to the Gramm-Leach-Bliley Act | Under the Gramm-Leach-Bliley Act |
|---|---|
| 1. Activities of Holding Companies | |
| Bank-holding companies (BHCs) could engage in nonbanking activities deemed to be closely related to banking under the Bank Holding Company Act of 1956, but only on a limited basis. A BHCs securities subsidiaries could derive up to 25 percent of revenue from underwriting and dealing in bank ineligible securities, subject to various firewalls set up by the Federal Reserve. 1/ BHCs were generally prohibited from underwriting most forms of noncredit-related insurance. | A new type of BHC—a financial holding company (FHC)—may engage in a broader range of financial activities that are outlined in the Act, determined by the Federal Reserve and in coordination with the Treasury to be financial in nature, or complementary. These activities include insurance and securities underwriting, merchant banking, and commercial investments made by insurance companies. No prior approval is required before an FHC begins to conduct these activities, but an after-the-fact notice must be filed with the Federal Reserve. However, before engaging in any of the new activities, all insured depository institution subsidiaries of the BHC must be well capitalized and well managed. |
| 2. National Banks | |
| National banks were not allowed to underwrite or deal in municipal revenue bonds. | Well-capitalized national banks and their subsidiaries may underwrite and deal in revenue bonds without limitations. |
| National banks were allowed to have operating subsidiaries engaged in activities permissible under the National Bank Act. National banks could also have “special” operating subsidiaries which engage in activities not permissible for the parent, but are still incidental to the banking business. | The authority of national banks to have operating subsidiaries is unchanged. However, national banks may also have “financial subsidiaries” that are engaged in financially related activities that national banks cannot conduct directly. Financial subsidiaries are not allowed to engage in insurance underwriting, real estate development investment, or merchant banking. |
| 3. Insurance | |
| National banks and their subsidiaries could provide insurance if the OCC determined that the activity was a part of or incidental to banking. Generally this restricted insurance underwriting activities to credit-related insurance. | National banks and their subsidiaries may not provide insurance products; title insurance (except under certain conditions) and underwriting annuities are also prohibited. |
| 4. Savings and Loan Holding Companies | |
| Savings and Loan holding companies that controlled no more than one saving association were not subject to any statutory restrictions on business activities such as those imposed on multiple saving and loan companies (unitary thrift” loophole). | The “unitary thrift” loophole is closed and no company can acquire control of a savings association unless the company is engaged only in activities currently authorized for multiple thrift holding companies; or activities permissible for FHCs. |
Although Section 20 of the Glass-Steagall Act prohibited banks from being affiliated with firms that are principally engaged in the underwriting of securities, the Federal Reserve had interpreted this regulation to allow banks to affiliate with firms that underwrite bank impermissible securities as long as this was not a substantial part of the affiliate’s business.
9. The Act allows FHCs to engage in a broad range of financial activities, including all securities underwriting and dealing, all insurance underwriting and sales, merchant banking, and equity investment. In addition, FHCs may also participate in certain nonfinancial activities, if the Federal Reserve rules that the activity is complementary and does not pose a substantial risk to the FHCs commercial banking affiliate. Such activities could possibly include real estate management, commodity trading, leasing, and accounting and auditing services.10
10. Another important feature of the GLB Act is that it provides banks an alternative to the FHC structure for engaging in new financial activities. National banks are now authorized to own or invest in a new type of subsidiary called a “financial subsidiary.” Generally, a financial subsidiary can participate in the same newly authorized financial activities as FHCs, with the important exceptions of insurance underwriting, real estate development, and investment, merchant banking, or other complementary activities. Foreign banks operating in the United States are also eligible to become FHCs in order to engage in the new range of authorized financial activities, but they are required to meet the same capital and management criteria as domestic banks.
11. With regard to banking supervision, the GLB Act empowers the Federal Reserve Board to be the “umbrella” supervisor for the financial holding companies. At the same time, the Act limits the Federal Reserve’s authority over the FHCs—the so-called “Fed-lite” provision—in that the functional regulators would continue to supervise the operating affiliates of the FHCs falling under their jurisdiction.11 While providing broad guidelines, the Act does not specifically lay out how umbrella and functional supervision should be implemented in practice, and how the activities of the various regulators and supervisors are to be coordinated.
C. Implications of the Gramm-Leach-Bliley Act
Impact on domestic financial services firms
12. The GLB Act dismantles the legal barriers between banking, securities, and insurance firms, offering more opportunities for firms to expand into new markets, diversify, and take advantage of economies of scope. The ability of a financial services firm to cross-sell a broad range of financial services and products offers the promise of enhanced efficiency and profitability. With greater legal certainty, and the prospects of greater profitability, consolidation among financial institutions is expected to continue, but many market observers do not expect consolidation to increase dramatically just because of the new legislation. Much of this activity was already taking place, as ad hoc regulatory changes since the 1980s had accommodated consolidation in many different forms.12
13. Although banks and securities underwriters have been allowed to affiliate with one another since the late 1980s, this practice was granted on a limited basis, and underwriting could only account for 25 percent of the subsidiaries’ total revenue. The GLB Act eliminates this restriction and allows bank-holding companies greater freedom in structuring their portfolios. The GLB Act also allows securities firms, for the first time, the option to buy banks. With the exception of the very largest securities firms, however, banks may be more likely to acquire securities companies, rather than vice versa, because banks tend to have larger capital bases. However, a sharp increase in the pace of consolidation is unlikely, since banks already had the option to buy securities firms.13
Impact on foreign banks
14. In the past, although U.S. banks were allowed to affiliate with securities firms and insurance companies on a limited basis, foreign banks that were engaged in the insurance business have been prohibited from acquiring U.S. banks. With the GLB Act, any foreign financial company will be able to acquire a U.S. bank, which will in effect eliminate the longstanding barriers to foreign insurance companies operating in the United States. Foreign financial institutions, however, have expressed some concerns that the GLB Act’s procedures for establishing a financial holding company could potentially be discriminatory, depending on how these procedures are implemented.14 In particular, they argue that the well-capitalized standard applied to foreign banks is unduly harsh because the U.S. employs higher capital requirements than those adopted by many foreign countries under the Basel Accord on Capital.15 Recognizing the difficulties that foreign banks may encounter because of national difference in capital standards, the Federal Reserve has adopted a flexible approach in dealing with foreign bank FHC applications to ensure fair treatment. If a foreign bank does not meet the well-capitalized standard, then the Federal Reserve considers applications on a case-by-case basis—taking into account differences in asset composition, debt ratings, or any other relevant information—to demonstrate comparable asset strength.
Changes in supervisory responsibilities
15. The rationale behind confirming the Federal Reserve as the umbrella supervisor for financial holding companies is that large financial services companies manage risk on a consolidated basis, and therefore it is important to understand the level of risk that the holding company potentially faces. The role of the Federal Reserve will be to assess the risks that exist at the holding company level that could impinge on the operating entities, and also to identify risks that exist across entities that have the potential to affect the holding companies and their affiliated banks. Therefore, the Federal Reserve, as the umbrella supervisor, faces an inherent tension of protecting the FHC and its banking entities from undue risk, while avoiding supervising the nonbanking affiliates—the responsibility of the functional regulators.
16. Although providing broad guidelines, the Act does not specifically lay out how umbrella and functional supervision should be implemented in practice. The Federal Reserve is expected to rely as much as possible on the examinations and reports prepared by the functional regulators. Moreover, the Federal Reserve is prohibited from applying any additional capital standards to any affiliate of a FHC that is already in compliance with the capital requirements of its functional regulator. At the same time, however, the Federal Reserve has the authority, under certain circumstances, to examine any affiliate of a FHC.16 To work effectively, the combination of umbrella and functional regulation will require open communication, and close cooperation and coordination among the various regulatory bodies.
17. The adequacy of this new arrangement will probably not be fully tested until an important entity within a FHC faces a period of stress, for example: the insolvency of an insurance subsidiary; the failure of a derivatives subsidiary; or a more broadly based market crisis which could threaten several parts of a financial holding company. In the absence of a clear plan for how the Federal Reserve and the functional regulators will cope under such circumstances—including how the Federal Reserve would gain quick access to information—such a period of stress may well reveal some shortcomings of this new regulatory framework. One source of such shortcomings is that the Federal Reserve does not have immediate access to detailed information about the exposure of insurance and securities subsidiaries even during times of market stress, and must rely on information that has been provided to the functional regulators. Unlike the Federal Reserve, the functional regulators do not operate under a mandate to ensure overall financial stability. For example, the SEC is focused on protection investors and stock market integrity, and the insurance regulators aim to protect the interests of policy holders. As a result, the reports generated by the SEC and the insurance regulators may not provide adequate information for the Federal Reserve to carry out its mandate of financial stability. However, many of the challenges to financial supervision posed by increasingly large and complex institutions were present prior to the GLB Act because of the trend toward consolidation. The focus of the Federal Reserve will continue to be on ensuring that the large complex financial institutions have sound risk-management systems in place.
Proposals for the use of subordinated debt in banking supervision
18. The increasing size and complexity of U.S. banking organizations has made banking supervision and the protection of bank soundness a more complicated task. Market discipline, which aims to align regulatory incentives with market incentives, can be an effective tool in complementing bank supervision to lower the vulnerability of the financial system to systemic risk. One possible approach to strengthen market discipline that has received considerable attention recently is a policy that would require large banks to issue subordinate notes and debentures on a regular basis.17
19. Subordinated debt is uninsured and is among the first (after equity) of a bank’s liabilities to lose value in the event that a bank encounters financial difficulties. Unlike equity, it does not benefit from the upside potential of greater risk-taking. A market for this debt already exists in the United States (about $100 billion of subordinated debt is outstanding), and empirical evidence suggests that differences in yields on this paper across issuing banks are linked to the perceived soundness of the individual banks.
20. The risk-sensitive nature of subordinated debt exerts a direct market discipline since the expectation of higher financing costs provides an incentive for a bank to refrain from engaging in excessively risky activities. It also can exert an indirect discipline when market participants and supervisory authorities monitor secondary market prices of such debt to assess the risk exposure (or potential for default) of a bank. Large negotiable CDs issued by banks already serve a similar signaling purpose. However, these securities are issued “voluntarily” by the banks, and if a bank were to encounter difficulties that could push up its cost of CDs, it might stop issuing these securities. Subordinated debt would provide a more continuous signal, since being mandatory, the bank would be forced to continue issuing this debt in such circumstances.
21. For a policy requiring issuance of subordinated debt to serve its intended purpose, a country has to have well-functioning and deep capital markets. The policy must specify that banks issue homogeneous instruments on a regular basis. Such a requirement can only be placed on large banks (possibly specified as a percentage of the banks’ assets) to ensure that there is sufficient liquidity for secondary markets to function properly. Regular issuance means that not only will a bank incur a higher cost of funds if its riskiness rises, but it will be compelled to regularly disclose new information on its current financial condition and prospects, which will contribute to ongoing reappraisals of the secondary market prices of the bank’s securities. The ability of banks to register security issues well in advance of when the securities are actually sold (such as so-called “shelf registration” in the United States) might limit the timeliness of data on a bank’s financial condition and prospects.
22. A possible disadvantage of subordinated debt as a tool of market discipline is that it could exacerbate contagion and limit supervisory discretion during times of systemic pressures. Instability in the financial markets could at times lead to flight from all subordinated debt, regardless of the soundness of the issuer, as investors generally seek to hold less risky assets. In such circumstances, lack of liquidity in the market could mean that prices do not reflect actual transactions, but only notional values. Also, in time of systemic pressures, market participants may come to expect that subordinate debt will be implicitly guaranteed by the government.
List of References
Barth, J., R.D. Brumbaugh Jr., and J.A. Wilcox, 2000, “Policy Watch: The Repeal of Glass-Steagall and the Advent of Broad Banking,” Journal of Economic Perspectives, Vol. 14, No. 2, Spring.
Berger, A.N., R. S. Demsetz, and P.E. Strahan, 1999, “The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future,” Journal of Banking and Finance, Vol. 23, June.
Berger, A.N., R. DeYoung, H. Genay, and G. Udell, 2000, “Globalization of Financial Institutions: Evidence from Cross-Border Banking Performance,” forthcoming in Brookings-Wharton Papers on Financial Services, Vol. 3.
Board of Governors of the Federal Reserve System, 1999, “Using Subordinated Debt as an Instrument of Market Discipline,” Staff Study 172, December.
The CEO’s Guide to Financial Reform: The Business Impact of the Gramm-Leach-Bliley Act, 2000, (Washington, DC. ISD/Shaw, Inc.).
Feldman, R.J., J.M. Lyon, and N.D. Willardson, 2000, “Have We Only Just Begun? Challenges in Implementing the Gramm-Leach-Bliley Regime,” The Region, Federal Reserve Bank of Minneapolis, Special Issue.
Furlong, F., 2000, “The Gramm-Leach-Bliley Act and Financial Integration,” FRBSF Economic Letter, No. 2000-10, March 31.
Meyer, L.R., 2000, “Supervising LCBOs: Adapting to Change,” Remarks before a National Bureau of Economic Research Conference, Prudential Supervision: What Works and What Doesn’t, Checca Lodge, Islamorada, Florida, January 14.
Meyer, L.R., 2000, “Implementing the Gramm-Leach-Bliley Act,” Remarks before the American Law Institute and American Bar Association, Washington, D.C, February 3.
Meyer, L. R, 1999, “Implications of Financial Modernization Legislation for Bank Supervision,” Remarks by Federal Reserve Board Governor Laurence Meyer before the Symposium on Financial Modernization Legislation, Sponsored by Women in Housing and Finance, Washington, D.C., December 15.
Moody’s Investor Service, 2000, “Financial Modernization and the Effects on Moody’s Ratings of U.S. Financial Institutions,” Special Comment, February.
Richardson, J. B., 2000, “Major Supervisory Issues Affecting International Banks,” Deputy Head of the EU European Commission Delegation to the United States, Speech at the Institute of International Bankers Annual Conference, Washington, D.C., March.
Saidenberg, M.R., and P.E. Strahan, 1999, “Are Banks Still Important for Financing Large Businesses?” Federal Reserve Bank of New York Current Issues in Economics and Finance, Vol. 5, No. 12, August.
Prepared by Paula R. De Masi.
The provisions are not effective immediately on the date of signing but will take effect between 3 and 18 months following enactment.
The decreased role of banks is particularly noteworthy for larger corporations, which are more able to tap the securities markets to satisfy short- and long-term financing needs.
Nine of the ten largest mergers and acquisitions in history in any industry took place in 1998, and four of these were in the banking industry.
The underwriting revenues from Section 20 affiliates were originally restricted to 5 percent of the subsidiary’s total revenue, but this amount was raised in two steps to 25 percent by 1996. The Federal Reserve also allowed banks to merge with large securities firms in 1996.
The FHC is also the channel through which a nonbanking financial company (for example, a securities or insurance company) is able to purchase a bank.
In addition, the depository institutions must have been rated “satisfactory” or “better” in their most recent Community Reinvestment Act examinations.
Unitary thrift institutions that already combine banking and nonfinancial commercial activities will be allowed to continue this practice, and also maintain the right to acquire commercial firms. However, if the thrift is sold, then this practice must be discontinued. Also, newly chartered thrifts will not be able to combine banking with commerce. FHCs will be the only entity able to engage in nonfinancial activities.
Functional regulators include the other federal banking agencies (such as the Office of the Comptroller of the Currency), the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the state-level insurance commissioners.
For example, the largest merger of a bank and securities firm prior to the GLB Act, Citicorp and Salomon Smith Barney, faced no regulatory obstacles.
In particular, the GLB Act requires that foreign banks meet a leverage ratio (that is a ratio of Tier 1 capital to total assets) that is not included in the Basle Accord.
The Federal Reserve Board can examine functionally regulated entities only if (i) there is reason to believe that the entity is engaged in activities that could pose risk to an affiliated depository institution; (ii) it is necessary to inform the Board about the risk-management system of the company; and (iii) the Board has reasonable cause to believe that the entity is not in compliance with the banking laws.
