Part IV: U.S. Bancorp Subsidiary Regulation

This part was written with the contribution of David Holtcamp 

               The banking industry has seen rapid growth and expansion over the past two decades.  This has occurred in two ways.  Banks have expanded their area coverage spreading across the nation in an effort to gobble up market share.  They have also expanded into new areas of business.  Historically regulators have been leery of both ways in which banks have recently broadened their power.  This Part of the series expands on the regulatory discussion from Part III and the historical background outlined in Part II of the series.  In all, U.S. Bancorp, the holding company, has twenty subsidiaries.  Of the twenty subsidiaries five are banks.  All of these banks are nationally chartered banks, including U.S. Bank N.A, U.S. Bancorp’s largest bank.[i]   Further, because all of these banks are nationally chartered they are under the supervision and may be examined by the Office of the Comptroller of Currency (“OCC”).[ii]  Additionally, all of the Banks are members of the Federal Insurance Deposit Corporation (FDIC).[iii]

 

                As a national association, U.S. Bank’s operation is governed by title 12, section 24 of the United States Code.  The Code states the corporate powers of national association in eleven subsections.  All of these subsections are essentially the same as what a non-banking corporation can do except for the seventh.  The seventh subsection states that a bank may only carry out functions within the business of banking or necessary to carry on the business of banking.[iv]  The majority opinion is that this means the activity must be “convenient or useful in connection with the performance of one of the bank’s established activities pursuant to its express powers under the National Bank Act.”[v]  U.S. Bank N.A. offers countless services under three broad categories: Personal Banking, Small Business, and Commercial & Government.  All of the services offered by the bank therefore must be either pursuant to one of the Bank’s express powers, or convenient in connection with an express power.  For example, U.S. Bank has the express power to take deposits.[vi]  An incidental power to that would be to run ATM’s that take deposits electronically or run small branches within large retail stores.  However, an incidental power would not include insurance coverage of on a car that was bought with a purchase money security interest provided by U.S. Bank.  But again, U.S. Bancorp could run a different subsidiary that could offer such insurance, and does with U.S. Bancorp Insurance Services, LLC. 

 

                Furthermore, because U.S. Bank is a nationally charter bank and not a state chartered bank, the Office of the Comptroller regulates the bank, as opposed to the FDIC which is charged with regulating state banks.  The OCC issues regulations and interpretive letters regarding the kinds of activities that a national bank can participate in.  As stated in the preceding paragraph, there is a lot of uncertainty in what incidental powers national banks have and the OCC is the first stop when a bank wants to branch out into a new business.  The OCC also has the responsibility of enforcing capital requirements against U.S. Bank.[vii]  There are three tests that the OCC uses to evaluate the capital of a national bank, the Tier 1 capital ratio, the “risk-based capital requirement”, and the “leverage limit.”[viii]  To be categorized as “Well Capitalized” tier 1 Risk-Based Capital Requirement as a Percent of Insured Bank Assets must be greater than 6%.[ix]  U.S. Bank as a tier 1 capital ratio of 6.5% which makes it “well capitalized”.[x]  Also, the risk-based capital requirement and the leverage limit must be greater than 10% and 5% respectively to be “well capitalized.”  U.S. Bank exceeds both and qualifies.[xi]  This is good because for U.S. Bancorp to remain a FHC, all of its subsidiary banks must remain “well capitalized.”

 

                The OCC defines “well managed” as an institution that has received a satisfactory rating in its most recent supervisory examination or subsequent review and at least a “satisfactory” rating for management, if such a rating is given.  Whether an institution is well managed is determined by the OCC when it does its CAMELS ratings.  The ratings go from 1 to 5 with 1 being the best.  A rating of at least a 2 is “well managed”.[xii]  We can assume that U.S. Bank N.A. is classified as well managed but we cannot know for sure because these documents are confidential and remain the property of the OCC after the reports are made.[xiii]              U.S. Bank NA is both well capitalized and well managed.  This means that it is a low risk bank allowing it much more freedom than would be allowed otherwise.  The bank itself gets perks such as fewer examinations, (with certain asset requirements) and a streamlined notice process for acquisitions.[xiv]  The largest incentive however goes to holding company, allowing it to be a FHC as opposed to a BHC as discussed in Part III of the series.

 

                Another subsidiary that U.S. Bancorp holds is NOVA information systems.  NOVA is a merchant payment processing company.  It holds an extensive network, which process credit card payments for its clients.  Today NOVA is the third larges of such processors processing over a billion transactions annually.[xv]  Additionally, by the second half of 2008, NOVA will be capable of processing all major credit card brands by adding the American Express network.[xvi]  The company has Canadian and European affiliates called NOVA Information Systems Canada and Elavon Merchant services respectively.  In all NOVA is in 30 countries and servicing transactions for over a million locations around the world.  In 2001, NOVA became a wholly owned subsidiary of U.S. Bancorp.  U.S. Bancorp is allowed to hold a data processing company under the Bank Holding Company Act.[xvii]  Data processing has been specifically picked out as being “closely related to banking” or “proper incident thereto.”  Therefore, U.S. Bancorp would not have to achieve the status of a FHC in order to hold NOVA, BHC status is sufficient to engaging in financial data processing.

These expansions of the banking industry while rather modest in U.S. Bancorp’s case have been broader.  The mega banks Citigroup and Bank of America leaving U.S. regulatory systems struggling to keep up with the evolving market place.  To quote the Department of the Treasury’s Blueprint for a Modernized Regulatory Structure:  “The United States has the strongest and most liquid capital markets in the world. This strength is due in no small part to the U.S. financial services industry regulatory structure, which promotes consumer protection and market stability. However, recent market developments have pressured this regulatory structure, revealing regulatory gaps and redundancies.”[xviii]  This statement illustrates the dichotomy in our marketplace.  Although we have historically seen dramatic declines in our market places and economy from time to time this relative uncertainty may be the price we pay for strong long term growth and success of our economy.

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[i] U.S. Bancorp, Annual Report (Form 10-K), Ex. 21 (Feb. 25, 2008).

[ii] Id at 115.

[iii] Id.

[iv] 12 U.S.C. § 24 (2006).

[v] Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972).

[vi] 12 U.S.C. § 24

[vii] 12 U.S.C. §3907

[viii] 12 U.S.C. 1831o(c)(1).

 

[ix] FDIC available at http://www.fdic.gov/news/news/speeches/archives/2005/chairman/spnov1005_dlinkA.html.  See also, 12 CFR Part 3 (defining tier 1 capital as (1) Common stockholders’ equity (2) Noncumulative perpetual preferred stock and related surplus; and (3) Minority interests in the equity accounts of consolidated subsidiaries, except that minority interests in a small business investment company or investment fund that holds nonfinancial equity investments, and minority interests in a subsidiary that is engaged in nonfinancial activities and is held under one of the legal authorities listed in section 1(c)(19) of this appendix A, are not included in Tier 1 capital or total capital.

[x] U.S. Bancorp, Annual Report (Form 10-K), at 53 (Feb. 25, 2008).

[xi]

Bank Regulatory Capital Requirements	US Bank NA %	Well-Capitalized %
Tier 1 capital	6.5	6
Total risk-based capital	10.8	10
Leverage	6.1	5

 

[xii] Federal Reserve Board of Governors, Memo: Expanded Examination Cycle for Certain Financial Institutions (May 11, 2007).  available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0708.htm

[xiii] 12 CFR 4.32, 4.36.

[xiv] 12 CFR Part. 4 available at http://www.occ.treas.gov/fr/fedregister/72fr54347.pdf

[xv] NOVA Information Systems website, http://www.novainfo.com/about-us/index.asp

[xvi] Payment News, NOVA to Sign and Service American Express Merchants, available at http://www.paymentsnews.com/2008/01/nova-to-sign-an.html

[xvii] 12 CFR 225.28(b)(14).

[xviii] The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure 138.