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2000 A Revolutionary Year For Local Financial Institutions

Since the Gramm-Leach-Bliley Act was enacted, the federal law has created a whole new game in the local industry


January 4, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

The public policy clearly established in the Gramm-Leach-Bliley Act (GLB Act), also known as the Financial Modernization Act of 1999, was an important catalyst for the monumental changes the financial industry has experimented this year and will continued to experience in the years to come.

From the standpoint of the local financial industry, the most important legislative accomplishment during the year 2000 was the enactment of a series of local legislative measures to provide Puerto Rico the mechanism to implement the extensive changes mandated by the GLB Act at the federal level.

"The effect of the [GLB Act] in the financial system should prove to be both positive and immense, in that the public will be better served by the significant additional competition provided by new players in each market for financial services, as well as by the improved channels for the distribution of financial products," Joseph O’Neill, commissioner of Financial Institutions of Puerto Rico, told CARIBBEAN BUSINESS.

The trigger effect was set on Nov. 12, 1999, when the U.S. Congress approved the GLB Act to deregulate the financial sector by allowing commercial banks to act as brokers and insurance providers. Under the law, bank subsidiaries can also operate real estate companies, merchant banking, and insurance businesses.

Brokerage houses and insurance companies are also allowed to enter each other’s businesses and into the commercial banking market.

Of the 13 banks that operate on the island, six of them–First Bank, Doral Bank, Oriental Bank, R&G, Banco Bilbao Vizcaya Argentaria, and Banco Santander–have changed their corporate structure to that of a financial holding company in order to enter into the local insurance and securities businesses. In addition, popular Inc. and Citibank, as nationally chartered banks, are also able to enter that business.

Bills to adapt financial deregulation

To locally comply with the federal mandate of banking deregulation, the Puerto Rico legislature enacted a series of measures–signed into law by Gov. Pedro Rossello in September 2000–which empowered the Insurance Commissioner and the Commissioner of Financial Institutions to initiate deregulation, while ensuring the protection of the banking and insurance sector.

On Sept. 8, 2000, the Banking Law was amended to establish as a basic banking power the ability to sell insurance products and empowers the Commissioner of Financial Institutions to adopt regulations for said purpose.

In addition, the insurance code was also amended to establish consumer safeguards for the sale of insurance by financial institutions or their affiliates and empowers the Insurance Commissioner to adopt the corresponding rules and regulations.

The Players

In anticipation of theses industry changes, last July Banco Popular became the first local bank to engage in the insurance business in Puerto Rico, following its acquisition of local insurance company R&B Insurance Agency Inc.

On Oct. 9, 2000, Doral Financial Corp. secured its approval from the Puerto Rico Insurance Commissioner to operate its insurance agency. The next day, Santander BanCorp received from the Insurance Commissioner of Puerto Rico the required licenses for insurance agent and general agent.

The latest move came from Banco Bilbao Vizcaya Argentaria Puerto Rico, which submitted the required licenses applications for insurance agent and general agent to the Insurance Commissioner of Puerto Rico in December 2000. The financial institution expects to offer insurance products by January 2001.

Other banks, such as, R&G, Oriental, and FirstBank are expected to enter the insurance business next year.

"Permission to sell insurance will strengthen the banking industry. Banks will be marketing a product included in all financial plans. Adding that diversity into the insurance market will decrease the risk taken by banks and the cost of these products," said Jose Enrique Fernandez, chairman and CEO of Oriental Financial Group. Fernandez said that Oriental would aggressively pursue opportunities in insurance distribution and Internet Banking.


Since the GLB Act was passed, many local banks have anticipated legal changes by acquiring or forming partnerships with securities firms.

In January 2000, Santander Securities, an affiliate of Banco Santander Puerto Rico, acquired Merrill Lynch’s $2.7 billion securities portfolio to become the island’s second-largest brokerage house.

The same month, FirstBank and Paine Webber formed a strategic alliance to offer brokerage services at the bank’s 42 branches island wide. Additionally, FirstBank has an alliance with Goldman Sachs to underwrite municipal securities.

Meanwhile, Citibank and Salomon Smith Barney reached similar agreements to sell securities at 12 of the bank’s local facilities.

This Caribbean Business article appears courtesy of Casiano Communications.
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