Reform Law Expands Bank's Options

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In the wake of the Gramm-Leach-Bliley Act of 1999, the structural options available for engaging in banking and other financial activities have expanded.

The act permits qualifying companies that own a bank -- "financial holding companies" -- to also own companies that engage in securities underwriting and dealing, insurance agency and underwriting, merchant banking or venture capital activities, the distribution of mutual funds, and securities lending.

Financial holding companies may hold any type of deposit-taking subsidiary, including a national bank, a state chartered bank, or a thrift or savings bank.

For a company to qualify as a financial holding company, however, each of its deposit-taking subsidiaries must be well capitalized and well managed, and have at least a "satisfactory" rating under the Community Reinvestment Act. Financial holding companies must also satisfy capital standards imposed by the Federal Reserve Board.

Because of these constraints and other implications of bank regulation, a financial company interested in "banking" should make a careful evaluation of the strategic benefits of various structures to find the ones that best serve its business purpose.

Also, although Gramm-Leach-Bliley closed the door on a commercial company's engaging in "banking" as a unitary thrift holding company, commercial enterprises can still engage in bank-like activities through some other structural options.

National bank. A national bank chartered by the Office of the Comptroller of the Currency is authorized to engage in the business of banking and "all such incidental powers as shall be necessary to carry on the business of banking." The evolving "business of banking" standard is unimpaired by Gramm-Leach-Bliley, so the OCC may continue to expand the activities permitted for national banks and their operating subsidiaries.

In addition, Gramm-Leach-Bliley creates a new category of subsidiaries of banks. "Financial subsidiaries" may engage in all activities determined to be "financial" by the Treasury Department. Expressly excluded are insurance underwriting, real estate development, and merchant banking activities.

Gramm-Leach-Bliley requires a national bank to:

Deduct investments in financial subsidiaries from the bank's capital when computing capital ratios.

Limit the total amount of investments in such subsidiaries.

Limit dealings between the bank and its financial subsidiaries.

In addition, the bank must be well capitalized, well managed, and have at least a "satisfactory" rating under the Community Reinvestment Act. Operating subsidiaries do not have these constraints.

State-chartered bank. Most states have "wild card" statutes that permit banks chartered in that state to engage in all activities permissible for national banks. State banks could engage in principal activities broader than those of national banks, however, only to the extent permitted by the Federal Deposit Insurance Corp. under section 24 of the Federal Deposit Insurance Act.

Gramm-Leach-Bliley does not impair the flexibility of the states to define the scope of permissible activities for state banks and their subsidiaries, though it imposes certain restrictions on new "financial subsidiaries" of state member banks.

The act requires a state member bank to be well capitalized and to meet CRA requirements before setting up a "financial" subsidiary. Unlike national banks, state member banks are not required to be well managed, or to limit their investment in the subsidiary.

Gramm-Leach-Bliley preserves section 24 and allows the FDIC to impose requirements on state nonmember banks in this area. The FDIC is proposing to impose restrictions on state nonmember banks essentially identical to those Gramm-Leach-Bliley imposes on state member banks.

Savings banks or thrifts. The unitary thrift charter continues to be a "banking" option for financial companies. …