With great fanfare, glowing speeches and rosy predictions of greater benefits to consumers, President Bill Clinton signed the Financial Services Modernization bill in 1999. Heralded as legislation that would lift barriers separating banks, insurers and other financial entities, the Gramm-Leach-Bliley Act is designed to knock down barriers from the Depression era and enable investment firms, insurance companies and banks to sell each others' products.

The idea behind the bill is to provide consumers with a financial supermarket - a one-stop shopping experience for financial services, says Hjalma E. Johnson, president of the American Bankers Association (ABA). In the future, he predicts, looking for financial products will be as convenient as shopping for groceries.

"Just as customers can now buy flowers, medicine, greeting cards and meat at a supermarket, customers will be able to get a range of financial products - from auto insurance to mortgages to brokerage services - all under one roof," explains Johnson. "Community banks also will have more tools, including greater access to lendable funds."

While that may be the goal of the Financial Services Modernization bill, such a transformation will not happen overnight. Changes will occur thanks to the banking deregulation bill, says Stacey Berger, executive vice president at Kansas City, Mo.-based Midland Loan Services, one of the largest commercial loan servicers and conduit originators in the country.

"The first question is, what are the entities going to look like going forward?" he says. "If you look at the three major constituencies - banking, investment banking and insurance - there clearly will be consolidation. It's clear that over time, entities will emerge that have the ability to participate in every spectrum of the commercial real estate finance business. Mortgage financing should be available on a more efficient basis. It's hard to believe consolidation can be much cheaper, but it should increase liquidity and the options that borrowers have."

Leveling the playing field Traditionally, banking, investment banking and insurance have focused on different areas of real estate finance with some overlap, Berger says. Banks concentrate on construction lending and short-term, floating-rate lending that is primarily relationship-based.

The investment banking business has two operations - advisory and transactional.

Investment bankers have a major market presence in the securitization business and take principal positions in assets that typically would have a higher yield.

The third component, the insurance companies, do not have a big overlap with banks and investment banks. They originate term loans and hold them in a portfolio. The other overlap is as an investor in commercial mortgage-backed securities (CMBS).

"There obviously is some overlap - related primarily to CMBS - in origination and securitization," says Berger. "We've already seen some overlay, such as Bank of America in traditional banking and also in investment banking. But again, I think a fully played out portfolio investment is something that we haven't seen. The most likely candidate for that would be Citigroup, with Salomon Smith Barney and Travelers.

"Although Travelers hasn't historically been a very significant portfolio lender, it does have a presence," he adds.

Basically, the Act's purpose is to level the playing field, recognizing the convergence of banks, insurance companies and securities firms, says Steve Jones, managing director of client management for real estate capital markets at Charlotte, N.C.-based First Union. "This is about the expectation that these companies continue to look more alike over time," Berger adds.

Observers note that the normal definition of a bank as an institution that merely takes deposits and makes loans changed some 15 years ago when many banks began diversifying their income streams through various product areas. Thus, the Gramm-Leach-Bliley Act reflects the advances of the financial services industry over that period.

"First Union, for example, already offers a full range of financial services, including traditional commercial banking, investment banking and capital markets services," says Jones. "All of these are offered in the context of real estate as an area of specialization as they are in other industry groups within our company."

In the case of First Union, the Act itself will not dramatically ramp up the company's real estate activities, explains Jones. "We've already 'built out' many of the products we will offer as a financial holding company. What it will do for First Union is enable us to enhance the product offerings we currently have. It will allow us to offer an even more robust variety of products and services."

In the real estate arena, the larger areas of focus would be merchant banking and brokerage, analysts say. For instance, in equity investment, banks have traditionally been significantly restricted, but the Act allows Financial Holding Companies (FHCs) to potentially expand this equity investment activity. "For real estate owners seeking well-capitalized partners, this is a positive development," says Jones.

However, Jones continues, the Federal Reserve and the U.S. Treasury Department still have to iron out some regulations. "It will be interesting to see how the Fed and Treasury deal with the regulations and how they differentiate among the various types of activities permitted across industry sectors," says Jones. "For example, is real estate going to have equal standing when compared with other asset classes in the case of merchant banking? What is appropriate?"

These are the types of questions that the regulators will be asking and responding to in the development of their guidelines. Nonetheless, for real estate owners, the Gramm-Leach-Bliley Act offers the potential for equity from large institutions. "It's just too soon to say how much or how quickly it will change the financial landscape from where we are today," says Jones.

Robert J. Walter, senior vice president and managing director of Chicago-based LaSalle Bank NA, a full-service subsidiary of ABM Amro with some $45 billion in assets, agrees that it may be too early to gauge the effects of the new banking landscape.

"To be candid, we haven't seen any impact yet from deregulation, and I am not sure how it will impact us," says Walter. "Theoretically, there should be some consolidation in the industry, and I see no reason to retort the conventional wisdom. Right now, in the financial markets overall, we have a fair bit of capacity. Whenever there is consolidation, there usually are efforts to reduce capacity, such as reducing back-office operations."

Does it really change anything? While many view the banking bill as an entree into consolidation - or greater consolidation by breaking down some of the barriers erected between investment banks, banks and insurance companies - perhaps those effects have been overstated.

"We saw Citicorp and Travelers merging even before the bill was passed," says Walter. "So did the deregulation bill really have an impact? Or did Citicor p and Travelers say this is going to happen anyway and we're going to do this?"

Thomas Kelly, vice president of Columbus, Ohio-based Bank One Corp., the nation's fourth largest bank holding company with assets of more than $265 billion, says that in the short term, the federal legislation will not have a great impact on Bank One.

"It will bring some immediate benefits," says Kelly. "For example, the bank's mutual fund division will now be able to sponsor or distribute its own mutual fund if it chooses. In the past, we had to hire a third party to administer some activities. Ultimately, the legislation can affect every line of business because it is like a recodification of financial services law. The legislation will allow the bank to offer a wider range of services to clients, deepening relationships with them. It has ripples and ripples that many people don't fully appreciate yet."

Steve Libert, vice president for the Midwest Region of Livingston, N.J.-based Berkshire Mortgage Finance, notes that banks were competitive before deregulation. "I don't think deregulation will have much further effect," says Libert. "From a commercial real estate lending perspective, we've always been in competition with banks, and I don't see that changing."

Libert notes that Berkshire Mortgage is primarily a multifamily lender with one of the largest Fannie Mae multifamily portfolios in America. "So our natural competitor is the local bank," he adds. "Typically, now that the larger banks have gobbled up many of the smaller banks, our competition is often the regional and national banks as well."

Libert says he does not think there will be any more - or any less - competition in the years ahead. "Already, there has been plenty of consolidation in the industry, and I can't say it's a result of changing regulations," he says. "Throughout the mid-1990s, much of the new business I developed was from borrowers who were affected by the consolidation in the banking industry. A lot of real estate guys had relationships with their local bankers.

"They'd sign the mortgage documents, shake hands, and that was it," Libert continues. "But many borrowers saw there was no longer that personal banking relationship after their bank was bought by a larger bank, as lending decisions were no longer being made at the local level. Those real estate owners and developers saw they weren't getting the VIP treatment anymore, and they went elsewhere."

Not really Some industry leaders doubt the financial services modernization bill will have any effect. Howard J. Levine, president and CEO of Calabasas, Calif.-based ARCS Commercial Mortgage Co., says he is not concerned about the new legislation.

"Banks really operate on culture, history and the people who are at the institution," says Levine. "That's what drives policy and lending decisions, especially in real estate lending. From that perspective, I don't see dramatic changes from what they have in place."

Levine says the reality today is that most major banks are no longer strictly depository and lending institutions that place real estate assets on the balance sheets. "Instead, virtually every major bank operates like a mortgage banker where they securitize their assets because, one, they want to be competitive and they have to make long-term fixed-rate loans; two, they don't want those liabilities on their balance sheet; and three, they are fee driven. For banks, the best way to get the most bang for the buck is to generate fee income."

Banks have traditionally operated in cycles, Levine adds. "Right now, the cycle is that they like real estate loans, so most banks are getting relatively aggressive in the real estate industry, making bridge loans, construction loans or doing whatever it takes to tie up the permanent loan," he continues. "A lot of them are spitting out permanent loans when and if the properties reach the performing stage. When the project is completed and achieves stability, they sell off that permanent loan to the secondary market. They utilize conduit sources or potentially Fannie Mae, whatever executes best."

Accordingly, ARCS has developed alliances to be competitive in the permanent property lending market and rid its balance sheet of assets. "We are the vehicle to help them dispose of that multifamily asset, which is sold to Fannie Mae or Freddie Mac, in the secondary market," he says.

Levine notes that Fannie Mae and Freddie Mac are becoming more aggressive this year than they have ever been. "This is because they are mandated to provide a larger percentage of their total business to the affordable housing area," he says. "Most apartments qualify as affordable housing to meet their FIRREA or HUD goals. Fannie and Freddie suddenly are very aggressive in apartment lending nowadays."

Still, the banking industry has high hopes for the financial modernization bill. "The legislation will bring consumers more choice, more innovative products and more competitive prices in the financial services marketplace," explains Johnson of the ABA. "It also ensures the continued health, safety and success of America's banking industry by giving it the tools it needs to operate efficiently and competitively in the new millennium."

Pundits say, however, that only time will tell how great an effect the bill will have on the real estate industry.