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The Dodd-Frank Act required the Government Accountability Office (GAO) to study the implications of removing existing exemptions from the definition of “bank” under the Bank Holding Company Act of 1956 (BHC Act).  On January 19, 2012, the GAO released its report.  Before getting into what the report means, a little background is necessary.

Under the BHC Act, bank holding companies are subject to regulations that include restrictions on the types of activities they can engage in – bank holding companies are only allowed to own and manage banks and engage in related activities.  The restrictions are designed to keep the banking and commerce functions separate in the U.S. economy. Existing exemptions provide that certain types of entities are not “banks” for purposes of the BHC Act, and thus the companies that own them are not bank holding companies subject to regulation under the BHC Act.  However, the non-“bank” institutions themselves are eligible for FDIC insurance.

In 2009 the Department of the Treasury proposed amending the BHC Act to remove the exemptions so that all holding companies owning institutions insured by the FDIC would be subject to regulation of commercial activities by the Federal Reserve.  When the Dodd-Frank Act was passed in 2010, in commissioned this study of the issue by the GAO and also imposed a three year moratorium on approvals for federal deposit insurance for exempt institutions.

The GAO study is focused on determining the number and characteristics of exempt institutions, describing the existing system of federal regulation (if any) of these exempt institutions, and analyzing the likely effects of removing the exemptions that prevent the holding companies of exempt institutions from being regulated as bank holding companies.

There’s a lot to unpack in the report, but here are some highlights:

  • Every institution with insured deposits is subject to some basic federal regulatory safeguards, but removing the exemptions in the BHC Act would subject the holding companies of formerly exempt institutions to “consolidated supervisory authority” of the Federal Reserve which, without getting into too many details, represents a much broader and deeper form of regulation.
  • Exempt institutions consist of industrial loan corporations (ILCs), limited-purpose credit card banks, municipal deposit banks, trust banks with insured deposits, and savings and loan institutions (S&Ls).
  • There are 1,002 exempt institutions, comprising 7% of the overall banking system.
  • Unlike other types of exempt institutions, the activities of S&L holding companies are already restricted by the Federal Reserve System Board of Governors pursuant to the Home Owners’ Loan Act.
  • ILCs are supervised by the Office of the Comptroller of the Currency for general soundness and avoidance of conflicts of interest, but their holding companies are not subject to restrictions on their activities.
  • Excluding S&Ls, there are only 57 exempt institutions (34 of them ILCs), comprising less than 1% of the overall banking system.
  • Only 8 of the non-S&L exempt institutions had assets of more than $5 billion, and more than 50% of them had assets of less than $500 million, which are relatively small numbers.
  • Since 2006 the number of ILCs and the amount of assets they hold has fallen by nearly 50% because some of the large ILCs applied to and have become bank holding companies under the BHC Act and because a moratorium on deposit insurance for new ILCs has caused some large corporations – including Ford Motor Company, Wal-Mart Stores, Inc., and theHome Depot – to abandon their plans to become ILCs.

Not surprisingly, representatives of exempt institutions indicated that subjecting the holding companies to regulation under the BHC Act would have a negative impact on the banking system and would further concentrate market share.  The GAO, by contrast, found that the removing the exemptions would have a “limited impact” on the overall credit market.  Industry representatives also reported that “the current regulatory framework was sufficiently robust,” while the Federal Reserve and Department of the Treasury reported that “the exemptions represent gaps in the current regulatory structure that pose risks to the financial system.”

Check back frequently at for the latest news and analysis relating to the implementation of the Dodd-Frank Act.

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