For those that subscribe to my blog, I apologize for being away so long.  I am have finally finished my law degree and am now working on passing the bar.  Hopefully I’ll have a little time to post some new material after the Holidays.  Hope everyone has a happy and safe Holiday season.

Tom

               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.

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 regret that my site has been the target of a rash of content theft.  Nearly half my material has been taken for use by others without my permission.  As a result, I have pulled some material and have suspended publishing several articles that are ready.  There is some recourse available that I will take to resolve the issue.  Currently, I am in the midst of preparing for my final exams for the semester.  I will return to resolve this problem as well as post new material once my exams are completed.

These articles are a summary of our look at U.S. Bancorp;  In light of recent turmoil within the financial industries my colleague David Holtkamp and I have put together a summary of our research.  David focused on the regulatory agencies (parts III and IV) and I on all other aspects of this series.   

U.S Bancorp is one of the largest financial holding companies in the United States.  It has total assets of over $237 Billion.[i]  The purpose of this series is to give a general overview of U.S. Bancorp and how it grew to such proportions.  Part I will discuss the history of U.S. Bancorp from germination to the beanstalk that it has become.  The leadership of the company will be examined in part II.  Parts III and IV will analyze the regulatory environment of U.S. Bancorp and its subsidiaries.  Finally, Part V will consider the past and present success of the company.