The Nonbank Activities of Bank Holding Companies

By Liang, J. Nellie; Savage, Donald T. | Federal Reserve Bulletin, May 1990 | Go to article overview

The Nonbank Activities of Bank Holding Companies


Liang, J. Nellie, Savage, Donald T., Federal Reserve Bulletin


In 1970, Congress amended the Bank Holding Company Act of 1956 to establish a new framework for the expansion of bank holding companies into nonbank activities. This article provides some historical background on the nonbank activities of bank holding companies. It also uses 1988 data from two relatively new bank holding company reporting forms to describe the extent of these nonbank activities and their contribution to the financial condition of bank holding companies. HISTORICAL BACKGROUND In the early 1900s, the bank holding company emerged as a new form of bank ownership. While the permissible business activities of banks were limited by state or federal law, bank holding companies were not banks and therefore were not subject to those limitations.

Relatively little is known about the extent of nonbank activities of early bank holding companies, but many of the companies appear to have been formed as a means of expanding geographically into areas in which branch banking was restricted, rather than as a means of engaging in activities prohibited to banks. Although a few bank holding companies owned major nonbank subsidiaries, most bank holding companies that expanded beyond banking combined a small bank with a company providing another financial service, such as an insurance agency. (1) The Bank Holding Company Act of 1956 Although the Glass-Steagall Act of 1933 made some provision for the regulation of multibank holding companies, the opponents of holding companies pressed for more restrictions. After numerous unsuccessful attempts during and after World War II, additional legislation to restrict the expansion of multibank holding companies was passed in 1956. (2) The motivation for this legislation, the Bank Holding Company Act of 1956, has been ascribed to various factors; most explanations focus on the fear of financial concentration resulting from a few multistate bank holding companies acquiring control over a large percentage of nationwide banking assets. This concern was addressed by the restrictions on interstate banking in the Douglas Amendment to the Bank Holding Company Act. The Douglas Amendment effectively prohibited interstate bank holding companies unless individual states specifically permitted their banks to be acquired by out-of-state holding companies.

In addition to the threat of concentration posed by extensive interstate banking, concentration also could result from the affiliation of major nonfinancial corporations with leading banking organizations. Many feared that huge banking and industrial conglomerates of this type would dominate the economic system. Therefore, restrictions were placed on the nonbank activities of bank holding companies.

Restrictions on the nonbank activities of multibank holding companies were based on several factors besides the concern with economic concentration. First, some believed that a bank holding company should not be permitted to perform activities that could not be performed directly by a bank. By this line of reasoning, if the activity was not safe or appropriate for a bank, then it was not safe or proper for an organization owning a bank. Second, many nonbank businesses feared that firms affiliated with banks would gain a competitive advantage over unaffiliated competitors in the same industry. These businesses were concerned that firms affiliated with banks would receive preferential credit treatment from the banks and would have access to low-cost funds provided by them from non-interest-bearing deposits. Third, there was a persistent fear that a bank would tie access to credit to the purchase of services provided by its nonbank affiliates. For example, if all of the bank's commercial borrowers were required, as a condition of obtaining credit, to buy their business travel services from the bank holding company's travel agency, the independent travel agencies would be unable to compete.

Given these concerns, the framers of the Bank Holding Company Act of 1956 restricted nonbank activities very severely and permitted mainly those activities incidental to banking or performing services for banks. …

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