This Part was written with the contribution of David Holtcamp
The banking industry is heavily regulated. Recently that regulation has come under critical review. The Department of the Treasury has issued their Blueprint for a Modernized Financial Regulatory Structure. To understand why bank regulation is a major topic of discussion is no great mystery. However, understanding the current general regulatory structure is important in deciphering why there is a call for reform. This part addresses how Financial Holding Companies are regulated using U.S. Bancorp as a model.
U.S. Bancorp is a Financial Holding Company (FHC) and thus it is subject to the regulation and examination of the Board of Governors of the Federal Reserve.[i] To become a FHC, U.S. Bancorp had to take four steps. First it had to be recognized as a Bank Holding Company (BHC).[ii] A BHC, as defined by the Bank Holding Company Act, is any company that has control over any bank or control over any other company that controls a bank.[iii] Second, all of U.S. Bancorp’s FDIC insured subsidiaries must be well-capitalized and well-managed.[iv] Third, each of those subsidiaries must receive at least a satisfactory examination rating pursuant to the Community Reinvestment Act.[v]Finally, U.S. Bancorp must file with the Federal Reserve Board declaring that it elects to be a FHC.[vi]
U.S. Bancorp has complied with all of these regulations and is now a FHC. First, U.S. Bancorp holds 5 banks as defined by the Bank Holding Act and thus is a Bank Holding Company.[vii] Second, as discussed later in the other parts of this expose, U.S. Bancorp’s banks are well-capitalized and well-managed. Third, U.S. Bank, N.A. received an “outstanding” overall rating in all but two of the states that it operates in.[viii] Finally, U.S. Bancorp has filed and is now an FHC.
U.S. Bancorp’s standing as a financial holding company as compared to a normal bank holding company significantly increases the types of investments that it is able to make. First, all BHC must get approval from the Federal Reserve Board to acquire any existing bank or to even acquire more than 5 percent of a bank’s voting shares.[ix] Second, a BHC’s activities are restricted to banking,[x] managing and controlling banks or other subsidiaries as allowed by the Act,[xi] and activities that are so closely related to banking as to be “proper incident thereto.”[xii] Finally, BHC’s are not allowed to own shares in any company that owns shares in “any” other company that accounts for more than five percent of any class of voting securities.[xiii] This means that BHCs cannot hold more than a five percent interest in an investment bank, and further, any non-banking related company such as PepsiCo for example.
As a FHC, U.S. Bancorp is able to conduct activities that are (1) financial in nature, (2) incidental to such financial activity, and (3) complementary to a financial activity.[xiv] This allows FHC’s to enter into the markets such as insurance and securities, of which they were not allowed to enter into before the Financial Services Modernization Act (Gramm-Leach-Bliley Act) was passed in 1999, permitting FHC’s. In fact, today U.S. Bancorp operates eight total insurance companies.[xv] Further, FHCs are allowed to purchase shares in any company as long as they do not actively manage or operate that company while it owns the shares.[xvi] Therefore, now U.S. Bancorp could operate an investment bank because it is financial in nature and could even own shares of PepsiCo.
The Federal Reserve Board of Governor has the duty of overseeing the activities of BHCs as well as FHCs. There are four major regulations that U.S. Bancorp must comply with.[xvii] First, it must give notice to the Fed about any acquisitions within 30 days of commencement. There is no longer a need for U.S. Bancorp to notify the Federal Reserve Board of Governors before acquiring shares of another bank. It merely has to notify it within 30 days of commencing such activity. If the Fed does not object then it is deemed to accept. This streamlines these activities. Second, if the Fed requires, it must submit reports on U.S. Bancorp’s financial conditions.[xviii] Third, the Fed is allowed to examine U.S. Bancorp and its subsidiaries for compliance with all laws and regulations.[xix] Finally, the Fed has nearly the exact same power as the federal banking agencies have over FDIC insured banks.[xx]
Although the Federal Reserve Board of Governors single handedly regulates banking activities of U.S. Bancorp, it is also a publicly traded corporation, incorporated in the state of Delaware. This means that it also falls under the oversight of the SEC and must follow the rules proscribed by the Security Exchange Acts of 1933 and 1934. Further, Delaware state law governs the rules of incorporation of U.S. Bancorp. These federal and state law regulations are not exclusive to BHC’s or Banks. They are applicable to corporations in general. it is important to know that U.S. Bancorp must also follow these regulations because there is a general call for reform in this area of regulation.
The Blueprint for a Modernized Financial Regulatory Structure proposes sweeping changes that could merge the SEC into a larger conglomeration of regulatory agencies. Currently, there is not any commitment regarding how these agencies will change. This is primarily due to the fact that we are in an election season. Look forward to some historical changes in how banks and other financial institutions are regulated shortly after the new Congress and White House Administration settle in.
[i]U.S. Bancorp, Annual Report (Form 10-K), at 114 (Feb. 25, 2008).
[ii] Bank Holding Company Act, 12 U.S.C. § 1843(l)(1).
[iii] 12 U.S.C. § 1841(a)(1).
[iv] 12 U.S.C. § 1843(l)(1).
[v] 12 U.S.C. § 1843(l)(2).
[vi] 12 U.S.C. § 2903(c)(2).
[vii] See 12 U.S.C. § 1841(c)(1)(A) (defining a banks as a bank insured by the Federal Deposit Insurance Act). All of the five banks controlled by U.S. Bancorp are FDIC insured and thus all are “bank” under the Act.
[viii] Community Reinvestment Act Performance Evaluation, Office of the Comptroller of Currency (Dec. 31 2005) available at http://www.occ.treas.gov/ftp/craeval/Jun07/24.pdf
[ix] 12 U.S.C. § 1842(a).
[x] 12 U.S.C. § 1843(a)(2)(A).
[xi] Id.
[xii] 12 U.S.C. § 1843(c)(8).
[xiii] 12 U.S.C. § 1843(c).
[xiv] 12 U.S.C. § 1843(k).
[xv]U.S. Bancorp, Annual Report (Form 10-K), Ex. 21 (Feb. 25, 2008).
[xvi] 12 U.S.C. § 1843(k)(4)(I)(iv).
[xvii]Jonathan R. Macey, Geoffrey P. Miller & Richard Scott Carnell, Banking Law and Regulation 437 (3rd ed. 2001).
[xviii] 12 U.S.C. § 1844(c)(1)(A).
[xix] 12 U.S.C. § 1844(c)(2)(A).
[xx] 12 U.S.C. §§ 1813(q)(2)(F), 1818(b)(3).
Filed under: Uncategorized | Tagged: Banking Law, Banking Regulation, U.S. Bancorp
