Investment Company Institute -19 ་ CONSEQUENCES OF BANK EXPANSION INTO THE MUTUAL FUND BUSINESS Before permitting banks to expand their activities into the mutual fund field, as would be accomplished by S. 1720, Congress must take account of the consequences that would attend such a major change in national policy. Increased Concentration of Economic Power Bank entry into the mutual fund business (including common stock and bond funds, as well as money market funds), raises serious questions whether the banks' new activities would lead to, or exacerbate, an undesirable concentration of economic power. Such concentration could take two forms: conglomerate and horizontal. Conglomerate concentration could result in instances where a single large bank provided a broad range of financial services. Horizontal concentra tion could occur if the number of firms providing a particular investment service was reduced. Horizontal concentration could result from bank entry into the mutual fund business, Public Policy Aspects of Bank Securities Activities: An Issues Paper, U.S. Department of the Treasury, at 14, (Nov., 1975). 85-952 0-81-46 Investment Company Institute -20 Either type of concentration would have undesirable results. An increase in securities-related activities by the banking industry could reinforce the trend toward concentration of corporate ownership by a small number of very large institutions. For example, at the beginning of 1979, institutions held approximately 43.4 percent of the market value of all common and preferred stock outstanding.* Recent studies indicate that institutional investor holdings are concentrated in the shares of relatively large companies to an extent greater than can be explained by the size of those companies relative to the market as a whole.** There is also a considerable degree of commonality among stocks in which institutional portfolios are heavily invested. The stocks being favored are those of the largest corporations, such as IBM and General Motors.*** Moreover, a recent study by Girton, of the University of Utah, contains the following sobering conclusion with respect to bank concentration: L. Girton, Concentration of Financial Power at 4, (unpublished 1981). Attached hereto as Appendix A. (Prof. Girton is a Professor of Economics at the University of Utah). H. Rosenberg, "Institutional Investors: Holdings, Prices and Liquidity", Financial Analysts Journal 30, 55. (March/April, 1974). L. Girton, Concentration of Financial Power, supra, Investment Company Institute -21 A view that emerges from the analysis of Contralization of investment activity of this type has the potential to distort the valuation function of the stock market, and may disproportionately allocate capital to various businesses. For example, some analysts believe that institutional investors tend to favor the stock of a limited number of "first tier" companies to the detriment of less favored "second-tier" firms, which are generally the smaller and emerging companies.** An increase in the role of banks as institutional investors could produce results that are presently unquantifiable. Such a potential influence on the capital markets should be the subject of a thorough analysis. Another type of concentration could occur in the form of the expansion of banks' multiple business relationships. Id. at 23. See, e.g., L.D. Solomon, Institutional Investors: Stock Market Impact and Corporate Control, 42 George Washington L. Rev. 761 (1974). Investment Company Institute -22 contacts with the same customer than do non-bank institutions. The SEC's Institutional Investor Study revealed the following information with respect to the frequency of these contacts: The more recent study by Professor Girton concludes that banks' stock investments are closely related to other ties: personnel interlocks, pension plan managerial relationships, and lending or deposit relationships.** This multi-service concentration was described, with concern, by Richard McLaren, then Assistant Attorney General Source, Institutional Investor Study Report, Vol. 5 at 2735, 2741. (Washington, D.C.: U.S. Government Printing Office, 1971). L. Girton, Concentration of Financial Power, supra, Investment Company Institute -23 in charge of the Antitrust Division, in testimony before Bank expansion in other areas permits the This can be illustrated by an example. A potential This structural problem is intensified because One Bank Holding Company Legislation of 1970, Hearings Before the Senate Committee on Banking and Currency, 91st Cong., 2d Sess. 239-40 (1970) (emphasis added). See also Mr. McLaren's remarks before the House Committee: The Bank Holding Company Act Amendments: Hearings Before the House Committee on Banking and Currency, 91st Cong., 1st Sess. 91-92 (1969). |