Today's credit markets, relationship banking, and tying: excerpted from an article by The Office of the Comptroller of the Currency, International and Economic Affairs Department, Law Department.(Selected Topic)

Considerable attention recently has focused on the practice of "relationship banking" widely employed ha the financial services industry, and on the issue of possible "tying" by banks. Most commercial banks have practices in place to evaluate the profitability of large corporate customers on the basis of their business relationship. Banks generally offer customers the choice of an array of products and services the customer may use to meet the bank's internal profitability standards. In certain instances, a bank may make a determination to exit a relationship with a customer who is unable to provide the bank sufficient revenues for the risks undertaken. Concerns have been raised over whether such relationship banking practices are consistent with federal anti-tying law, which generally prohibits banks from conditioning the availability or price of one product on the purchase of another product, with various exceptions.

Several recent reviews initiated by Congress, regulatory organizations, and interested industry participants relate to tying matters. In 2002, the Office of the Comptroller of the Currency ("OCC") and the Board of Governors of the Federal Reserve System ("Board") responded jointly to two requests from Congressman Dingell questioning whether banks are tying the availability or price of credit to investment banking services. (1) At about the same time, the General Accounting Office ("GAO"), at the request of Congressman Dingell, initiated a review of banks' tying practices. More recently, Congressmen Oxley and Frank made a similar request to the GAO to update the earlier report and to analyze various issues relating to section 106(b) of the Bank Holding Company Act Amendments of 1970.

Further, the National Association of Securities Dealers, Inc. ("NASD") has been investigating broker-dealers affiliated with commercial banks and seeking to determine whether tying of investment banking services and commercial credit has occurred in possible violation of NASD rules. (2)

Description of Relationship Banking Practices

Relationship business practices, that is, building on existing business relationships in order to enhance the profitability of those relationships for the relevant business, have been an integral component of the success of capitalist economies. From a sales and marketing perspective, no service-oriented business can survive without continually evaluating who its customers are, the types of products they require and purchase, and their overall profitability to the company. Accordingly, common business practices include developing and pursuing customers whose relationship generates or will potentially generate significant revenues for the corporation.

Relationship banking practices represent just one type of relationship business practice. The availability of one type of product may provide the bank an opportunity to cross-market and sell customers other types of financial services. A customer-initiated request may prompt a bank to offer multiple products and services. Throughout the decades, banks often have made business decisions on the basis of the customer's overall business relationship with the banking organization. (3) Thus, relationship business is a well-established and long-practiced approach to conducting business.

The removal of earlier legal and regulatory barriers to certain bank activities has resulted in banks increasingly generating and depending upon revenue from a greater variety of products and services than was historically the case. Moreover, in recent years, the financial services markets within which banks operate have become increasingly competitive, with investment banking firms and other non bank financial services providers offering bank-like products to their customers. This has led banking organizations to seek to maximize the profitability of their existing customer relationships by enhancing both the quality and the number of the products and services they provide to each customer.