Be wary of 'tying' arrangements.

• Author: Sagner, James S.
• Position: Treasury

Has your banker discussed your overall business relationship lately? Was there an implicit suggestion that you had better buy all of your banking products from that source or credit might not be made available? The threat of withholding access to credit affects everyone, as loans are the lifeblood of a corporation.

Because of low profitability on loans to large companies, banks are demanding that credit and non-credit activities be linked--that is, credit will not be provided without receiving most or all of a corporate customer's other business. In an Association of Finance Professionals (AFP) survey of senior managers at nearly 700 companies, half of the respondees claimed to have been denied credit or seen changes to lending terms because they did not purchase other services from their bankers.

As a result, companies are consolidating all of their business in one or two banks, are working with their bankers to make the arrangement profitable and are searching for backup credit sources in case the bank says "adios."

What is a Tying Arrangement?

Linking credit to any other bank product--you must buy this (cash management services) to get that (credit)--is known as a "tying" arrangement, and is illegal under general antitrust laws, the Sherman and Clayton Acts and the Bank Holding Company Act Amendments of 1970 (BHCA).

The general antitrust approach by the courts has been to apply a "rule of reason" that considers the power and control of the market by the seller. The BCHA makes such ties illegal per se, that is, without regard to the economic impact of the seller or other rule of reason balancing.

The General Accounting Office (GAO) is expected to report this month on the situation, although the Office of the Comptroller of the Currency has been claiming that there have not been any illegalities. The Federal Reserve has recently proposed new rules that will make banks guilty of tying if corporate credit and non-credit business must be purchased to meet a preset minimum revenue level. Bank attorneys tell account officers to avoid explicit demands that clients purchase "linked" products, although there have been numerous instances where bank officers clearly indicate their expectations.

Some observers have become overly emotional on the subject. For example, a Wall Street Journal lead editorial (Apr. 21, 2003) worried over cut-rate loans offered to win fee-based business. Concerns were expressed over eroding credit quality, taxpayers who...