LegiStorm

Summary:

Companies that control banks are required to be regulated and supervised by the Federal Reserve (Fed) as bank holding companies (BHCs). The BHC structure is widely used by both small community banks with simple structures and the largest, most complex financial institutions in the United States. Regulation and supervision are tailored to impose more complex, stringent requirements on large, complex BHCs than on small ones. The Fed is the “umbrella” supervisor for the entire BHC but defers to the primary regulators of the bank, securities, and insurance subsidiaries. The Fed has greater responsibility for the parent holding company and nonbank subsidiaries that do not have a primary regulator. Currently, the key goals of BHC regulation are to maintain the separation of banking and nonfinancial commerce, limit BHCs to permissible activities, ensure that BHCs do not undermine the safety and soundness of their banking subsidiaries and prevent banks from subsidizing their affiliates, prevent mergers and acquisitions from resulting in monopolies or excessive concentration, and mitigate systemic risk posed by large BHCs. Banks are regulated for safety and soundness and subject to supervision because of their access to the federal safety net— principally, Federal Deposit Insurance Corporation (FDIC) deposit insurance and the Fed’s discount window—and the systemic risk they can pose. BHCs are not subject to the close prudential regulation that their bank subsidiaries are. BHC regulation is intended to ensure that the rest of the BHC does not gain access to the safety net and the advantages that derive from it and that the other parts of the BHC do not undermine the bank subsidiary’s safety and soundness. A number of regulatory requirements support these three goals. Various grandfathering and exceptions make each requirement less than universally applicable under all circumstances. First, BHCs must act as a “source of strength” for their bank subsidiaries. Second, BHCs with over $3 billion in assets must comply with the same Basel capital requirements as banks on a consolidated basis. Third, transactions between banks and their affiliates (including parent companies and their nonbank subsidiaries) are subject to restrictions to limit the bank subsidiaries’ exposure to risks posed by affiliates and to prevent banks from subsidizing affiliates. Fourth, control rules and restrictions on management interlocks prevent a company from controlling multiple unaffiliated banks without registering as a BHC subject to Fed supervision. Fifth, a bank cannot “tie” the offer of one of its products to another product offered by the bank or another part of its BHC. Finally, the Fed determines what activities are permissible for BHCs to engage in. Contrary to traditional notions that banking is limited to taking deposits and making loans, BHCs engage in a broad range of activities that the Fed has deemed to be closely related to or incidental to the business of banking. BHCs may have both bank and nonbank subsidiaries. In addition, BHCs that elect to become financial holding companies (FHCs) can engage in any activity that has been deemed financial in nature, allowing banks, securities firms, and insurance firms to operate under common ownership and engage in a variety of other financial activities. Following the 2008 financial crisis, the Dodd-Frank Act (P.L. 111-203) strengthened BHC regulation. For example, it attempted to mitigate systemic risk posed by large banks through the enhanced prudential regulation (EPR) of large BHCs by the Fed. The emergency federal intervention to prevent systemic risk associated with the failure of three large banks in 2023—two of which did not have BHCs—raised questions about whether the BHC is the appropriate target for EPR. Policy questions that Congress has grappled with ever since the Bank Holding Company Act of 1956 was enacted include how BHCs should be regulated, who should be subject to that regulation, and what activities they should be allowed to engage in.