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A Series of Occasional Papers in Draft Form Prepared by Members^
THE MEETING OF PASSION AND INTELLECT: A HISTORY OF
THE TERM “BANK” IN THE BANK HOLDING COMPANY ACT
John J. Di Clemente
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83-1
The Meeting of Passion and ■ Intellect;:
A History of the term "Bank" in the
Bank Holding Company Act
by
John J. Di Clemente*
* Regulatory Economist, Federal Reserve Bank of Chicago. The author is
indebted to David Allardice, Kit O'Brien, Diana Alamprese, and Ed Nash
of the Federal Reserve Bank of Chicago for helpful comments. Any errors
remain those of the author. The views expressed do not necessarily repre
sent those of the Federal Reserve Bank of Chicago.
Table of Contents
Page
Section
I.
Introduction...............................................
1
Section
II.
The Legisaaiive History...................................
3
Section III.
Board Administration of the BHCA
and the Definition of ’'Bank".......................
8
III.
(A)
Commercial Loans and Engaging
in Making Commercial Loans........ . ............... 10
III.
(B)
Accepting Demand Deposits................................. 15
Section
IV.
Section
V.
Are Thrifts ’’Banks"?.............................
23
Conclusion................................................. 34
EXECUTIVE SUMMARY
This paper examines the term "bank" as it has been defined in the Bank
Holding Company Act.
The Bank Holding Company Act of 1956 was enacted to
effectively limit the concentration of control over banking resources by bank
holding companies and to separate banking from nonbanking interests.
Critical
to the accomplishment of these purposes is an understanding of what a "bank"
is.
At the time the act was passed there was little debate on what
constituted a bank.
banks from nonbanks.
In fact, the act employed a chartering test to separate
However, this simple chartering test was found to be
largely inconsistent with the purposes of the act.
Through amendments to
section 2(c) of the Bank Holding Company Act, the definition of the term
"bank" has been narrowed to where an institution must now satisfy a two part
activities test to be called a bank.
The activities which make an institution
a "bank" are (1) accepting demand deposits and (2) engaging in commercial
lending activities.
A review of letters and orders of the Board of Governors of the Federal
Reserve System and its ■ staff reveals that:
*"Commercial loans" are considered to be all loans to
individuals or businesses, secured or unsecured, ex
cept loans the proceeds of which are used for personal,
household, family, or charitable purposes. The term
also includes the purchase of such instruments as com
mercial paper, bankers acceptances, certificates of
deposit and similar instruments.
*To be "engaged in the business of making commercial loans",
an institution needs to conduct a regular commercial loan
business on a more or less unlimited basis with such busi
ness constituting a significant portion of the institution’s
total business.
*The term "demand deposits" represents any deposit available
to the general public which is accessible through checks or
drafts payable to third parties.
-2-
*The term "bank" contemplates a single institution. How
ever, assurances must be given to insure that affiliate
organizations are truly separate organizations and that
the deposit-taking activities of one affiliate are not
supporting the commercial lending activities of another
affiliate.
This paper also reviews the issue of bank/thrift affiliation and asks,
"Are thrifts banks for the purposes of the Bank Holding Company Act?"
Thrifts
have typically been distinguished from banks as a result of their limited
ability to offer services to commercial enterprises.
Recent legislative
initiatives have increased the commercial lending authority of federally
chartered thrifts.
Based on previous rulings, the Board would have had to
reevaluate its position.
Congress was cognizant of the dilemma that the Board
would have faced and in the Garn-St. Germain Depository Institutions Act of
1982 explicitly excluded federally chartered or insured savings and loan
associations and savings banks from the definition of "bank".
Although
thrifts begin to resemble banks to a marked degree, they are not deemed to be
"banks' for Bank Holding Company Act purposes.
But whether institutions
possessing the powers of federally chartered thrifts but are not federally
chartered or insured are "banks" remains an open question.
The Board has indicated that it is prepared to recommend changes in the
definition of "bank" to Congress.
The Board views the acquisition of
"consumer banks" or "nonbank banks" by nonbanking companies as attempts to
evade the requirements of the Bank Holding Company Act.
The attempts by
Dreyfus Corporation, a mutual fund manager, to acquire a bank in
New Jersey
and to establish a de novo bank in New York provide recent confirmation of
this trend.
The recommendations to Congress have still to be formulated.
-3-
Whatever the recommendation it is imperative that they be judged against the
purposes of the act.
It has become increasingly difficult to separate banks from nonbanks.
These difficulties arise as a result of financial innovation spurred by the
desire of institutions to avoid costly regulation.
With increasing
technological change, the term "bank" may become an anachronism.
In order to
maintain the integrity of the Bank Holding Company Act, it is essential that
consideration be given to revising the term "bank" so .as to accomplish the
purposes of the act without causing undue economic dislocations.
The Meeting of Passion and Intellect:
A History of the term "Bank" in the
Bank Holding Company Act
Section I.
Introduction
In 1960, in Cleveland Heights, Ohio, a manager of a movie theater was
convicted of violating an obscenity statute by possessing and exhibiting
a French film entitled "Les Amants" ("The Lovers").
reached the U.S. Supreme Court on appeal.
The case eventually
The Court ruled in the
In a separate
manager's favor, declaring that the film was not obscene.
concurring opinion, Justice Potter Stewart highlighted the great
difficulty in defining material to be obscene:
"...under the First and Fourteenth Amendments criminal laws in this
area are constitutionally limited to hard-core pornography.
I shall
not attempt to define the kinds of material I understand to be embraced
within that shorthand description; and perhaps I could never succeed in
intelligibly doing so. But I know it when I^see it, and the motion
picture involved in this case is not that."
The "know it when I see it" principle also has adherents in the financial
community.
In a series of articles appearing in Euromoney,
2
three
banking luminaries, Walter Wriston (Citibank), Samuel Armacost (Bank of
America), and Willard Butcher (Chase Manhattan) discussed banking and its
future.
For Wriston, the banks of the 1990's are already here.
trouble is that bankers are not running them.
The only
Wriston suggests that
nonbank companies can do everything a bank does—and more.
espoused by Wriston reduces to a set of simple propositions:
bank holding companies are highly regulated entities.
The view
Banks and
Nonbank companies
have been expanding into areas that had traditionally been the domain of
banks.
These nonbank companies are not nearly as highly restricted in
2
what they may offer customers or where they may make the offering.
That
is, relative to banks, these nonbank concerns have the advantage of a
wider diversity of products (services) which may be offered to customers
without geographical restriction.
Accordingly, in the view of Wriston,
bank and bank holding companies are at a significant competitive
disadvantage relative to their financial nonbank adversaries.
If nonbank financial institutions can do everything a bank can do, why
are they not referred to as "banks"?
Or, more importantly, why are such
nonbank financial institutions relieved of the regulatory burdens to
which banks and bank holding companies are subjected?
Is banking by its
nature so mutable that it defies definition, leaving one to rely on the
"know it when I see it" principle?
Without establishing a context in which the term "bank" is to be
used, it would be nearly impossible to define a bank or banking per se.
Accordingly, this article examines the term "bank" as it is defined in
the Bank Holding Company Act of 1956 (the BHCA).
Inasmuch as the Board
of Governors of the Federal Reserve System (the Board) has the
responsibility of administering the BHCA, it is pertinent to determine
its views on what is or is not a bank in carrying out the purposes of the
BHCA.
Because the question of whether an institution is a bank for
3
purposes of the BHCA has been litigated only once,
the Board's views on
the subject possess enormous weight.
Section II of this article establishes the legislative background of
the BHCA and the term "bank" as used therein.
Section III addresses the
Board's statements in interpreting the BHCA definition of "bank" and its
application of the term in Board Orders regarding bank holding company
applications.
Section IV reviews the Board's policy respecting
3
bank/thrift affiliation and asks, Are thrifts banks within the meaning of
the BCHA?
Finally, the enormous changes expected in the nation's
financial structure and the Board's response to those changes are
discussed in the context of administering the BHCA.
Section II.
The Legislative History
Banks, like other financial institutions, act as intermediaries between
borrowers and lenders, creating assets■and incurring liabilities to
creditors (including deposit holders).
As Samuelson notes:
"[bjanking is a business much like any other business. The
commercial bank is a relatively simple business concern. A bank
provides certain services for its customers (depositors and borrowers)
and in return receives payments from them intone form or another. It
tries to earn a profit for its stock owners"
However, at the time Congress was debating whether or not to subject bank
holding companies to effective regulation by the Federal Reserve, banks
were considered to be "unique" institutions, unique enough to at least
distinguish them from other financial intermediaries.
The uniqueness
was their ability to create liabilities (demand deposits) that are used
as a transaction medium.
Samuelson states that:
"[b]y definition, [commercial banks] are the only
organizations able to provide "bank money," i.e., checkable deposits&that are conveniently usable as a medium
of exchange."
This distinguishing feature gives banks a key role in the payments
mechanism.
Furthermore, banks also provide commerce and industry with
the credit needed to function efficiently.
Indeed, commercial banks are
the primary source of short-term credit to commercial and industrial
firms.&
Because of their preeminent role in the nation's payments system, banks
became subject to stringent federal regulation.
The regulatory framework
!
k
that developed was one designed primarily to protect the integrity of the
payments mechanism and to protect holders of bank deposit liabilities.
However, regulation of bank holding companies lagged the development of
comprehensive bank regulation by several decades.
The call by the Board to regulate bank holding companies was made a
decade after the bank failures of the late 20’s and early 30’s.
The
Board in its Annual Report of 1943 noted that its existing authority to
supervise bank holding companies under the Banking Act of 1933 was
severely limited and that:
"[a]cccptee rulls of law conffne the bbssness oo banks to bank
ing and prohibit them from engaging in extraneous businesses
such as owning and operating industrial and manufacturing concerns.
It is axiomatic that the lender and borrower or potential borrow-?
er should not be dominated or controlled by the same management."
Furthermore, the Annual Report noted that:
”[ tjhere is now no effective control over the expansion of bank holding
companies either in banking or in any other field in which they choose
to expand ... The Board believes, therefore, that it is necessary in
the public interest and in keeping with sound banking principles that
the activities of bank holding companies be restricted solely to the
banking business and that their activities be regulated, as are
the activities of banks themselves.”
Thus, the Board was proposing a regulatory framework which would prohibit
the use of the holding company device to do indirectly what the bnfcould not do directly.
Not lfeil 1956 were the Board's wishes satisfied by the enactment of
the BHCA.
The purpose of the BHCA was twofold.
First, there was the
desire to prevent undue concentrations of banking control by bank holding
companies.
Secondly, ■ the BHCA evidenced Congress’ concern with the
ofmmieganfg of aaf-ing and fofaan-nng interests.
The potential adverse consequences of commingling banking with
ffeban-nfg interests preyed on the minds of the legislators framing the
5
BHCA.
Bank holding companies might, for example, insist on making
unsound loans to the holding companies' nonbank affiliates to the
eventual detriment of the bank, its depositors, and the public.
Or, they might deny credit to or discriminate unfairly against the
competitors of the nonbank affiliates of the holding company.
There was
also the possibility of tie-in arrangements in which an individual or
business would be required to purchase additional services offered by the
bank holding company as a condition of receiving bank credit.
All three consequences revolve around the use of bank credit to create
an unfair competitive advantage for the holding company and its
subsidiaries.
Whether holding companies would be expected to use the
credit weapon in such a fashion is debatable.
Nevertheless, concern was
fairly widespread that the unfair use of credit by holding companies had
occurred in the past and it was therefore reasonable to protect against
its possible misuse in the future.
Original Act - A Chartering Test
The original definition of bank in section 2(c) of the BHCA employed a
chartering test.
"Bank" was defined to include:
"Any national banking association or any state bank, savings bank, or
trust company, but shall not include any organization operating under
section 25 or 25(a) of the Federal Reserve Act, or any organization
which does not do business within the United States."
The Senate Report accompanying the bill stated:
"The Committee is of the opinion that the definitions in this bill
will adequately cover the organizations which should be included
in the scope of the bill without unnecessarily encompassing organiza
tions that.need not be included in order to accomplish the purpose of
the bill."
As Amended - The Activities Test
As originally enacted, the term "bank" was too broadly defined to
accomplish the purposes of the legislation.
To remedy this defect, when
6
the BHCA was amended in 1966, the definition of bank in section 2(c) was
amended to read:
’’’Bank' means any institution that accepts deposits that the depositor
has a legal right to withdraw on demand ...."
In explaining the change from a chartering test to an activities test the
section-by-section summary of the reported bill reads:
"Section 2(c) of the [BHCA] defines "bank" to include savings banks and
trust companies, as well as commercial banks.
The ■ purpose of the
[BHCA] was to restrain undue concentration of control of commercial
bank credit, and to prevent abuse by a holding company of its control
over this type of credit for the benefit of its nonbanking subsidiar
ies. This objective can be achieved without applying the [BHCA] to sav
ings banks, and there are at least a few instances in which the refer
ence to "savings bank" in the present definition may result in covering
companies that control two or more industrial banks. To avoid this re
sult, the bill redefines "bank" as an institution that accepts deposits
payable on demand (checking accounts), the commonly accepted test of
whether an institution is a commerciall^ank so as to exclude industrial
banks and nondeposit trust companies."
Given Congress’ concern with the possible abuse of bank business
credit, it is unclear why the definition of "bank" adopted in 1966 made
no mention of the credit activities of the organizations to be defined.
It seems reasonable that if one were to control the possible abuse of
bank credit activities that any definition might encompass the activities
related to that concern.
Presumably, under section 2(c), an institution
which accepted demand deposits yet did not engage in extending commercial
credit would fall within the ambit of the BHCA, a result clearly at odds
with the purposes of the BHCA.
Accepts Demand Deposits and Makes
Commercial Loans
In 1970, section 2(c) was again amended. The definition of "bank" was
narrowed to include:
"any institution ... which (1) accepts deposits that the depositor
has a legal right to withdraw on demand, and (2) engages in the
business of making commercial loans."
7
The added requirement that an institution be engaged in commercial
lending was introduced by Senator Edward Brooke (R., Mass.). While not
explained, the amended definition appears to be consistent with the
original intent of the BHCA.
In a letter to Senator John Sparkman (D.,
Ala.), Chairman of the Committee on Banking and Currency, J. L.
Robertson, member of the Board of Governors, wrote:
"... S. 3823 would amend the definition of "bank" to exclude banks
that make no commercial loans. To the best of our knowledge, this
amendment would have very limited application at present, possibly af
fecting only one institution.
Since there is less need for concern
about preferential treatment in extending credit where no commercial
loans are involved, and in view of the very limited application of^
the amendment, the Board would have no objection to its adoption."
Section 2(c) was most recently amended by enactment of the Garn-St.
Germain Depository Institutions Act of 1982 (P.L. 97-320).
The act
excludes from the definition of "bank" any institution that is insured by
the Federal Savings and Loan Insurance Corporation or chartered by the
Federal Home Loan Bank Board.
(The significance of this exclusion is
fully discussed in the following section entitled "Are Thrifts Banks?")
A Narrowing of Definitions
With each successive amendment of section 2(c), the definition of
"bank" has been narrowed, having moved from a chartering test in 1956 to
an activities test in 1966 and 1970.
Unfortunately, Congress left little
more than the definitions cited as a guide in the administration of the
BHCA.
Of course, the Board can rely on the purposes and objectives of
the BHCA in carrying out -its mandate.
This course of action is not
without pitfalls, for it may be the case in certain situations that the
BHCA's literal language and Congressional intent .are not in harmony.
In
these circumstances, the Board has given relatively greater weight to the
BHCA's purposes.
8
Section III. Board Administration of the BHCA and the Definition of
"Bank"
The recent (1982) decision by the Comptroller of the Currency approving
the application of McMahan Valley Stores of Carlsbad, California, to
establish banking units in its retail furniture stores is one in a series
of events which raise the issue of the proper definition of "bank" for
BHCA purposes.
Reportedly, the establishment de novo of Western Family
Bank by McMahan Valley Stores marks the first time the Comptroller’s
office has granted a nonfinancial institution permission to open a
bank.
12
Other initiatives in the recent past also have important
ramifications for the financial system and the Board's administration of
the BHCA and its interpretation of the term "bank."
Among these are the
acquisition of Valley National Bank of Salinas, California, by Household
Finance Corporation and the acquisition of Fidelity National Bank,
Concord, California, by Gulf & Western Corporation.
All three of the "bank" acquisitions have been by nonbank holding
companies.
Since, by definition, a company that owns or controls a bank
is a bank holding company and therefore subject to regulatory review of
its activities and acquisitions, why were these bank acquisitions not
subject to official Board review and approval?
Why aren't Gulf &
Western, McMahan, and Household Finance deemed to be bank holding
companies pursuant to the BHCA?
The answer to these questions lies in
the definition of the term bank in section 2(c) of the BHCA and action
taken by the acquirers of these institutions (which, for lack of a better
term, may be termed "consumer banks") to substantially alter the
institutions' activities so they fall outside the reach of that
definition.
9
The definition of bank as contained in section 2(c) of the BHCA is as
follows:
"'Bank' means any institution organized under the laws of the
United States, any State of the United States, the District
of Columbia, any territory of the United States, Puerto Rico,
Guam, American Samoa, or the Virgin Islands, except an insti
tution the accounts of which are insured by the Federal
Savings and Loan Insurance Corporation or an institution
chartered by the Federal Home Loan Bank Board, which (1) ac
cepts deposits that the depositor has a legal right to with
draw on demand, and (2) engages in the business of making
commercial loans.
Such term does not include any organization
operating under section 25 or section 25(a) of the Federal
Reserve Act, or any organization which does not do business
within the United States except as an incident to its activities
outside the United States.
"District bank" means any bank or
ganized or operating under the Code of Law for the District of
Columbia.
The term "bank" also includes a state chartered bank
or national banking association which is owned exclusively (except
to the extent directors' qualifying shares are required by law)
by other depository institutions or by a bank holding company
which is owned exclusively by depository institutions and is oper
ated to engage exclusively in providing services for other deposi—
tory institutions and their affiliates, directors, and employees."
The section 2(c) definition of a bank ■ is composed of three elements:
(1) location;
(2) the acceptance of demand deposits; and (3) the
engagement in commercial lending activities.
The definition does not ex
pressly include certain institutions but it does exclude those
organizations whose major purpose it is to finance and facilitate inter
national and foreign trade such as Edge Act and Agreement Corporations.
In addition, federally chartered or insured savings and loan associations
and savings banks are excluded from coverage.
The location element has
raised few interpretative problems since its administration.
But,
elements (2) and ()) are investigated because they serve to define those
activities which make an institution a "bank" for purposes of the BHCA.
One note of caution is in order.
The Board or its staff, at times,
makes pronouncements regarding what are considered to be "commercial
loans", to be "engaged in the business of making commercial loans", and
10
to be "demand deposits" within the meaning of section 2(c).
These
interpretations and postures by the Board are usually developed within a
framework of particular applications or proposals, each with ■ their own
set of unique circumstances.
Therefore, not only is it important to read
the Board's words at their face value, it is also of paramount importance
to understand the circumstances surrounding the words.
Section III.
(A) Commercial Loans and Engaging in
Making Commercial Loans
(1) Greater Providence
The Board's earliest pronouncement under the 1970 definition of bank in
section 2(c) is contained in its letter of July 1, 1971,. regarding
Greater Providence Deposit Corporation.
Greater Providence was at the
time a bank holding company by reason of its ownership of Greater
Providence Trust Company, an uninsured commercial bank.
A question arose
as to the bank's status upon plans to dispose of its commercial loan
business.
Specifically, would Greater Providence Trust Company continue
to be a "bank" upon divestiture of its commercial loan business, while
still accepting demand deposits?
In response to the proposal, the Board
stated that it:
"... is of the view that "commercial loans," as used in
section 2(c), must be regarded as including all loans
to a company or individual, secured or unsecured, other
than a loan the proceeds of which are used to acquire
property or services used by the borrower for his own
personal, family^or household purposes, or for chari
table purposes."
The letter further states that:
'... if your commercial bank ceases to engage in the
business of making commercial loans of this type
either directly or indirectly by channeling deposits
to an affiliated institution which does make loans of
this type,.it would not fall within the definition of
"bank"..."1'’
11
The Board thus fashioned a rather broad definition of the term
"commercial loans".
Furthermore, if institutions sought to divest
themselves of their commercial loan business, the Board would require
assurances that deposits gathered at the deposit-taking institution would
not be used to support the commercial lending functions of affiliates of
the deposit-gathering institution.
In Greater Providence, the Board’s
conclusion was conditioned upon the resulting demand deposit-taking
institution not supplying or maintaining the availability of funds
(except through dividends) to any affiliate that makes commercial loans.
Indeed, the Board reserved the right to examine the books of the
institutions in question to insure the separability of the demand
deposit-taking and commercial lending functions in affiliated
organizations.
In a later letter to Greater Providence Deposit Corporation, the Board
explained certain terms used in the July 1, 1971 letter.^
Specifically,
the term "funds" as used in the. letter was deemed to apply to "any and
all funds from whatever source derived and in whatever form they may be
shown on the balance sheet of [Greater Providence Trust Company]."
That
is, the separability of the deposit-taking institution was^to be
complete—it could not supply or maintain funds derived from its
acceptance of demand deposits or from other sources to any commercial
lending affiliate.
The basis for this total separation and broad
application of the term "funds" is dictated by section 2(c), which
"contemplates a single ’institution,' and which is inapplicable only
where there are two truly separate entities.""?
It is of some significance that the Board did not require Greater
Providence Trust Company to divest itself of its existing portfolio of
commercial loans.
12
(2) Boston Safe Deposit
The Board was soon confronted with another circumstance which called
for an elaboration of the phrase, "engages in the business of making
commercial loans".
In this instance, Boston Safe Deposit and Trust
Company, a subsidiary of the Boston Company, Inc., was primarily engaged
in a trust business.
Boston Safe Deposit and Trust Company both accepted
demand deposits and made loans to individuals.
The proceeds of some of
these loans had been used for business purposes by the borrowers.
The
factual circumstances posed two immediate questions for the Board:
(1)
Are such loans commercial loans within the meaning of section 2(c)? and
(2) Did Boston Safe Deposit and Trust Company engage in the business of
making commercial loans, assuming an affirmative answer to (1)?
The Board decided that for the purpose of section 2(c) loans made by
Boston Safe Deposit and Trust Company to individuals and secured by
nonbusiness assets, but ultimately used for business purposes were within
the meaning of the term "commercial loans."
18
Having decided that Boston
Safe Deposit and Trust Company made commercial loans, the Board next
addressed the question of whether it was engaged in the business of
making such loans. An affirmative answer to this interrogatory would
necessitate Boston Safe Deposit and Trust Company being termed a "bank"
because, in addition to its commercial lending activities, it also
accepted demand deposits.
The Board concluded after studying the lending
function at Boston Safe Deposit and Trust Company that . it was not engaged
in the business of making
determination was fourfold:
commercial loans.
The basis for this
13
(1)
Boston Safe Deposit and Trust Company did not make commercial
loans except on a limited and occasional basis;
(2)
the loans it made were to its trust customers as an accommodation;
(3)
in any event, such loans were not in an amount in excess of two
percent of Boston Safe Deposit and Trust Company's total assets;
and
(4)
Boston Safe Deposit and Trust Company did not solicit commercial
loan business and did not maintain a credit department.
The Board also noted in relation to the Boston Safe Deposit case that
the sale of Fed funds constitutes an unsecured loan, but that the sale of
Fed funds by Boston Safe Deposit and Trust Company is not tantamount to
the making of a commercial loan for purposes of the BHCA.^
Whether the
sale of Fed funds in other circumstances would constitute a commercial
loan for BHCA purposes is unclear for the Board did not specify the
circumstances which might serve to distinguish Boston Safe Deposit from
other cases in this respect.
21
(3) Gulf & Western
With these two earlier Board decisions in mind, it is understandable
how the Board decided that Fidelity National Bank, Concord, California
(Fidelity), was not a "bank" and that Gulf & Western, which had
indirectly acquired it, was not a bank holding company.
Fidelity divested itself of all of its commercial loans prior to its
acquisition by Gulf & Western.
Fidelity also committed to limit its
lending to loans for personal, family, household, or charitable purposes.
In addition, it intended to document its compliance with the above
commitments and, most importantly, agreed to separate completely its
deposit-taking activities from any commercial lending activities of its
affiliates.
22
Given the precedents established by the Greater Providence
14
and Boston Safe Deposit cases, the Board could not very well require Gulf
& Western to seek the prior approval of the Board of its acquisition of
Fidelity since Fidelity would not be a "bank.”
(4) Dreyfus Corporation
The Board’s most recent (1982) statement regarding the meaning of
'commercial loans” and "engages in the business of making commercial
loans” is contained in its response to a Change in Bank Control
notification filed with the Federal Deposit Insurance Corporation by
Dreyfus Corporation, New York, New York.
23
Dreyfus Corporation proposed
to acquire Lincoln State Bank, East Orange, New Jersey, a full-service
commercial bank.
The bank was to divest its commercial loan portfolio
and to cease making commercial loans.
However, the bank was expected to
place funds in certificates of deposit and similar market instruments.
The .Board’s letter indicates that, after studying the various types of
extensions of credit for the purposes of identifying the lending
activities that qualify an institution as being "engaged in the business
of making commercial loans”, it concluded that the definition of
"commercial loans” is:
"broad in scope and includes the purchase of such instru
ments as commercial paper, bankers acceptances, and certi
ficates of deposit, the extension of broker call loans,
the sale of federal funds, and similar lending vehichles.”
The Board concluded that because Lincoln State Bank would continue to
accept demand deposits and use its deposits to purchase market
instruments such as those mentioned above, that it would be "engaged in
the business of making commercial loans” and thus be a "bank” under the
BHCA.
As such, the Board determined that Dreyfus Corporation’s
notification to the FDIC was improperly filed and that the acquisition is
subject to the BHCA.
15
The Board has provided guidance in its statements regarding the
interpretation of "commercial loans" and "engages in the business of
making commercial loans."
A "commercial loan" is considered to be all
loans to companies or individuals, either secured or unsecured, except
for loans where the proceeds are used to acquire property or services for
>
personal, family, or household, or.charitable purposes.
»
A demand
deposit-taking organization can make commercial loans and still not be
classified as a bank under section 2(c) so long as it is not engaged in
the business of making such loans.
It appears that such an organization
would not be engaged in the business of making commercial loans if:
(1) it does not conduct a regular commercial loan business;
(2) its commercial loan transactions are on a limited
basis; and
(3) its commercial loans are insignificant in relation to its total
business (e.g., less than two percent of total assets).
Finally, according to the Board, section 2(c) contemplates a single
institution both making commercial loans and accepting deposits, and two
entities apparently would not be treated as one institution under section
2(c) provided they are truly separate entities.
This separation
requires:
(1) the deposit-taking institution not supplying or maintaining the
availability of'funds (other than through dividends) to any
affiliate engaged in commercial lending;
(2) separate corporate identities; and
(3) measures undertaken which would insure true separation, such as
regular reporting requirements and examinations.
Section III. (B) Accepting Demand Deposits
In order to be a bank within the meaning of section 2(c), an
institution, in addition to being engaged in commercial lending, must
also accept deposits that the depositor has a legal right to withdraw on
16
demand.
The legislative history of section 2(c) reveals that Congress
used the term "demand deposits" and "checking accounts" interchangeably.
Accordingly, it would appear reasonable to interpret the section to
encompass any organization that offered checking accounts to the general
public as being embraced under this element of section 2(c).
(1)
Wilshire
The case of Wilshire Oil Company of Texas v. Board of Governors,
668 Fed. 2d 732 (3d Cir. 1981), is the only case involving a judicial
interpretation of the term "bank" under the BHCA.
And revolving as it
does around' the proper definition of the term "demand deposits", it is
invaluable to any understanding of how that term is applied by the Board.
The Wilshire case involved Wilshire Oil Company of Texas, Jersey City,
New Jersey, which became a bank holding company on December 31, 1970, as
a result of the ,1970 Amendments to the BHCA. These amendments, among
other things, subjected one-bank bank holding companies to the provisions
of the BHCA.25
At the time Wilshire Oil Company became a bank holding company by
virtue of its ownership of Trust Company of New Jersey, Jersey City, New
Jersey (Trust Company), it also engaged in various nonbank activities
deemed impermissible for bank holding companies.
Pursuant to section
4(a)(2) of the BHCA, Wilshire Oil Company was required by December 31,
1980, either to cease engaging in the impermissible nonbank activities or
to divest itself of its commercial bank.
Wilshire Oil Company informed the Board that it intended to retain its
nonbanking interests.
However, it would comply with the BHCA and cease
to be a bank ■ holding company through a plan whereby Wilshire Oil Company
would alter the demand deposit-taking activities of Trust Company.
17
The plan called for Trust Company to notify its demand deposit holders
of Trust Company’s reservation of the right to require 14 days’ prior
notice of withdrawal from such accounts.
It was believed that this
reservation of right to prior notice would legally remove the affected
accounts at Trust Company from the definition of demand deposit in
section 2(c).
The Board, in its Final Decision and Order of April 2, 1981, rejected
Wilshire Oil Company's contention that the reservation of the right to
require prior notice would effectively remove Trust Company from the
definition of bank contained in section 2(c).
The Board concluded that
Trust Company was a "bank"; that Wilshire Oil Company was a bank holding
company; and that the retention of Trust Company beyond 1980 resulted in
a violation of the BHCA.
The Board’s reasoning, as reflected in the Final Decision and Order,
was that the reservation of the right to require 14 days* prior notice
was a sham transaction intended solely to evade the BHCA’s requirements.
It noted that Trust Company had offered to both commercial and individual
customers deposit accounts that were immediately accessible through
checks or drafts payable to third parties.
The Board noted further that:
"In interpreting the meaning of the term "bank” as used
in a federal statute such as the [BHCA], the Board is
not bound by the labels that parties to a private con
tract may place on a transaction or by the superficial
form of the activity involved; rather the Board must
look to the substance of the transaction to determine
if the activity comes within the ..meaning and purposes
of the [BHCA]." (Emphasis added)
"...the Board believes that, while the language of the
statute is the proper starting point, any inquiry into
the meaning of "bank" may properly consider the context
in which the language is employed in the [BHCA] as
whole as well as the overall purpose of the [BHCA]."
18
Thus, it was the Board's belief that a literal interpretation of
section 2(c) would frustrate the purposes of the BHCA.
Accordingly, the
Board ignored the form of the transaction (i.e., the conversion of demand
deposit accounts into accounts which nominally required 14 days' prior
notice of withdrawal) and emphasized its economic reality.
28
Wilshire Oil Company petitioned the Court of Appeals for the Third
Circuit for review of the Board's action, centering its position on a
literal reading of section 2(c).
straightforward:
Wilshire Oil Company's position was
the statutory definition must be applied in accordance
with the plain meaning, which compels the conclusion that Trust Company
is not a "bank" because it does not accept demand deposits; it is the
legal relationship, not the functional one, which is important under the
BHCA.
In Wilshire Oil Company's
view, allowing the Board the type of
authority it asserted was to permit administrative usurpation of the
legislative role.
To Wilshire Oil Company, the Congressional words were
clear and unambiguous, and to be faithful to Congressional will, Trust
Company should not have been declared to be a "bank".
29
The Court of Appeals decided in favor of the Board, stating, in what
amounted to a paraphrase of the Board's Final Decision and Order, that:
"fwjhile the language of the [BHCA] may be the starting point in
construing the statute, we may look beyond the plain language, if
necessary, to ensure that application of the litegal terms does not
destroy the practical operation of the statute."
The Court of Appeals concluded that Trust Company is the type of
institution that Congress meant to include within the definition of
bank under section 2(c) because Trust Company had made no functional
change in its banking operations and the reservation of a right to
require notice had no practical effect on the bank's deposits.
31
19
Wilshire Oil Company's petition for a rehearing in banc by the Court of
Appeals was denied, as was its petition for a writ of certiorari to the
U.S. Supreme Court.
Thus, the Circuit Court's decision stands as the
only judicial interpretation of the scope and applicability of section
2(c) and the limits of the Board's authority with respect thereto.
Credit Balances
(2)
The issue of whether certain credit balances may be designated as being
the functional equivalent of demand deposits has come before the Board on
several occasions in connection with the operation of companies organized
under Article XII of New York State Banking Law (so-called Article XII
Investment Companies:).
32
In New York, such companies possess most of the
powers of commercial banks with the exception that they cannot accept
deposits.
The activities of such concerns are so like those undertaken
by commercial banks that there is a question whether they should be
regarded as "banks" for purposes of the BHCA.
Under state law, New York Investment Companies may, among other things,
borrow and lend money; acquire and dispose of bills of exchange, drafts,
notes, acceptances, and other obligations for the payment of money; issue
letters of credit; buy and sell foreign exchange; receive funds for
transmission to foreign countries; and receive and maintain credit
balances incidental to, or arising out of, the exercise of its lawful
powers.
33
Traditionally, New York Investment Companies have served as an
entry vehicle for foreign organizations seeking to enter the U.S.
In Banque National de Paris,
34
the Board entertained an application by
a bank holding company to retain the shares of French American Banking
Corporation (French American), a New York Investment Company, pursuant to
section 4(c)(9) of the BHCA.
35
The Board determined that, for the
purposes of the BHCA, French American was not a "bank" because it did not
20
accept demand deposits.
In effect, the Board concluded that credit
balances of New York Investment Companies were not the equivalent of
demand deposits.
The Board's decision in the matter of Banque National de Paris is based
on one major consideration:
credit balances at French American arise
only incidentally to transactions that it is legally permitted to perform
for its customers.
French American is not generally authorized to
solicit or accept deposits of idle funds and credit balances are not
permitted to be used in the manner of a checking account for personal or
business transactions other than to make payments in connection with the
importation or exportation of goods.
In essence, credit balances lack the convenience characteristics of
general checking account facilities.
This distinction, which, according
to the New York Superintendent of Banks, is "meaningful" and
"administrable" and the fact that French American is principally engaged
in financing or facilitating transactions in international or foreign
commerce led the Board to decide that French American was not a "bank"
for purposes of the BHCA.
36
Another section 4(c)(9) application, this time filed by The Bank of
Tokyo, Ltd.,
37
occasioned the Board's reconsideration of the distinction
between demand deposits and credit balances.
In this instance, The Bank
of Tokyo, Ltd. sought to organize Tokyo Bancorp International (Houston),
Inc. (TBI), under a general charter as a Texas nonbanking corporation.
TBI's business, like that of New York Investment Companies, would be
primarily international in character.
And, like such companies, TBI
would receive so-called "due-to-customer accounts", which are similar to
credit balances at New York Investment Companies, serving many of the
same functions as demand deposits in commercial banks.
21
The Board, in denying the application, stated that TBI is not
necessarily a bank within the meaning of section 2(c).
However, because
of the close resemblance of TBI to a "bank", approval of the proposal
would be inconsistent with the purposes of section 3(d) of the BHCA, the
so-called Douglas Amendment, which generally limits the acquisition of
additional banks by bank holding companies to the state in which they
principally conduct their banking business.
Since The Bank of Tokyo,
Ltd. already had banks operating in California and New York, the Board
believed that it would somehow violate the spirit, if not the letter, of
section 3(d) to permit the establishment of TBI.
Thus, with The Bank of Tokyo, Ltd, a dichotomy developed.
On one hand,
the Board had determined that although TBI closely resembled a "bank”
that it, in fact, might not be a bank within the meaning of section 2(c).
Yet, on the other hand, the Board concluded that, in effect, TBI was a
bank for purposes of section 3(d) of thq BHCA.
Had TBI been established
in California or New York, the location of existing bank subsidiaries, it
is uncertain how the Board would have reacted.
An application filed by European-American Bancorp to retain the shares
pf European-American Banking Corporation, a New York Investment Company,
pursuant to section 4(c)(8) of ' the BHCA provided the Board with a major
opportunity to clarify its position regarding the equivalence of credit
balances to demand deposits and the resemblance of New York Investment
Companies and similar organizations to commercial banks.
38
In European-American the Board again decided that credit balances
should not be regarded as demand deposits for purposes of section 2(c).
Noting the fact that credit balances at New York Investment Companies are
in many respects the functional equivalent of demand deposits and that
22
such balances should be subject to federal banking regulation, including
reserve requirements and interest rate controls, the Board nonetheless
concluded that New York Investment Companies are not "banks."
This
conclusion rests on three main pillars:
(1)
The legislative history of the BHCA indicates that the
provision of checking accounts is one of the features
distinguishing commercial banks from other financial institutions;
(2)
There exist historical, legal, and administrative distinctions
between credit balances and deposit accounts in New York; and
(3)
Congress had exhibited a general intent to exclude
international banking corporations from the BHCA's definition of
"bank".
Accordingly, so long as European-American Banking Corporation continued
to engage primarily in international banking activities, the Board would
not extend the definition of "bank" to cover it.
The Board thus
sustained its 1971 ruling in Banque National de Paris.
However, the Board's approval in European-American was conditioned on,
among other things, the divestiture of European-American Banking
Corporation's two California branches.
In the Board's view, Congress had
not intended section 4(c)(8) to authorize the ownership of companies by
domestic bank holding companies which would allow an international
banking business to be conducted on a multi-state basis outside of the
explicit ' legal ■ framework established by Congress in section 25 and
section 25(a) of the Federal Reserve Act (Edge and Agreement
Corporations).
Because the California offices were not subject to the
restrictions on domestic business imposed on Edge and Agreement
Corporations, European-American Bancorp was seen as having an unfair
competitive advantage.
Governor David M. Lilly dissented in European-American based on his
view that European-American Banking Corporation should be regarded
23
as a "bank".
In his dissent, Governor Lilly noted the anomaly that, for
monetary policy purposes, the Board views the equivalence of credit
balances to demand deposits as being so strong as to include credit
balances in the definition of the narrow M-l money supply.
Indeed,
subsequent to the European-American decision, the Board defined credit
balances to be deposits for purposes of Regulation D, which was revised
to implement the reserve requirement provisions of the Depository
Institutions Deregulation and Monetary Control Act of 1980 (the Monetary
Control Act).
39
The Board's concern with nonbank proposals that would have the effect
of complicating or confounding monetary control is also voiced in
European-American.
The Board stated that:
"(A]ny proposal under section 4(c)(8) that would have the
effect of diminishing the reserve base either by facili
tating the acceptance of reserve-free credit balances or
encouraging a shift from reservable deposits to^guch
balances would entail serious adverse effects."
Monetary policy concerns have surfaced in more recent proposals by bank
holding companies seeking to acquire thrift institutions.
4"
Section IV. Are Thrifts "Banks"?
The general public has a tendency to agglomerate savings and loan
associations, savings banks, and commercial banks into one homogeneous
mass comprising a significant part of the financial services industry in
this country.
For many individuals, patronizing a savings and loan
association is the equivalent of patronizing a commercial bank.
For many
users of financial services, savings and loan associations and savings
banks are reasonably good substitutes for commercial banks.
Nevertheless, for certain customers, business and commercial enterprises,
there had existed major distinctions between commercial banks and thrifts
prior to enactment of the Garn-St. Germain Depository Institutions Act of
24
1982 (Garn-St. Germain).
These distinctions arose due to the legal
restrictions placed upon thrifts in performing services for the
However, the distinctions had been slowly eroding
commercial enterprise.
and, indeed, Garn-St. Germain may have obliterated any meaningful
distinction between thrifts and commercial banks.
With the thrifts' increasing commercial lending powers the question
Should thrifts be regarded as banks within the
faced by the Board is:
meaning of section 2(c)?
The response to this question has broad
implications for the future development of the financial services
industry.
As one example, if thrifts were deemed to be "banks" any
company owning or controlling such a thrift would be subject to the BHCA.
As it stands, under the Savings and Loan Holding Company Act
42
companies
owning but one savings and loan association are not subject to extensive
regulation regarding the activities in which they may permissibly engage.
However, should savings and loan associations qualify as "banks", their
holding companies would be subject to the BHCA's restrictions regarding
permissible nonbank activities.
The history of bank/thrift affiliation is a tangled web of public
policy concerns which have been addressed in previous Board Orders.
With
the 1970 Amendments to section 4 of the BHCA, the Board was authorized by
Congress to consider proposals by bank holding companies to engage in
nonbanking activities.
Section 4(c)(8) of the BHCA establishes a
balancing test to be utilized by the Board in assessing the
permissibility of nonbank proposals.
Specifically, section 4(c)(8)
exempted from the general nonbank prohibitions of section 4:
25
“shares of any company the activities of which the Board...has
determined (by order or regulation) to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto.
In determining whether a particular activity is a proper incident to
banking or managing or controlling banks the Board shall consider
whether its performance by a bank holding company can reasonably be
expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency that outweigh
possible adverse effects:, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound
banking practices."
Under the authority granted in section 4(c)(8), the Board has
determined that certain nonbank activities are permissible for bank
holding companies;, such as operating a mortgage banking concern, trust
company, or finance company.
43
The Board announced in "972 that it did
not intend to include the operation of a savings and loan association to
the list of permissible activities.
44
The reasons offered at the time
were based on the proposition that savings and loan associations were
governed under a different statutory framework than banks and that
Congress intended such' institutions to be preserved as specialized
lenders to the housing industry.
with bank holding companies
by Congress.
The Board believed that affiliation
would tend to blur the structure established
Because of the broad public policy issues involved in
bank/thrift affiliation the Board felt that Congress should address the
issue. This theme later surfaced in a number of Board decisions:.
The Board in "974 entertained an application by American Fletcher
Corporation, Indianapolis, Indiana, to acquire Southwest Savings and Loan
Association, Phoenix, Arizona, under section 4(c)(8).
45
In
American Fletcher, the Board appeared close to settling the public policy
issues it desired Congress to consider.
Specifically, with respect to
the issues of housing finance, statutory separation, and regulatory
framework, the Board stated:
26
"[It] has also considered whether the affiliation of Southwest
with [American Fletcher] would adversely affect the flow
of funds into any housing market. The record contains no
evidence supporting assertions to that effect... The combin
ed effect of statutory and regulatory prohibitions against,
and limitations upon, Southwest's transactions with [American
Fletcher] and its subsidiaries and effective supervision by
the appropriate agencies would effectively bar any significant
diversion of funds from Southwest to [American Fletcher] and
any adverse effect upgg the flow of housing funds in the area
served by Southwest."
In American Fletcher the Board considered, as required, whether the
operation of a savings and loan association was "closely related to
banking".
The Board concluded that such activities are closely related
to banking and, further, commented on the trend toward lessening
distinctions between commercial banks and savings and loan associations:
"Geographic restrictions on mortgage lending by savings and loan
associations have been liberalized. Recently, savings and loan
associations were permitted by the Federal Home Loan Bank Board to
participate in the Federal funds market, previously dominated by
commercial banks.
Savings and loan associations recently were
authorized to offer large negotiable certificates of deposits. The
role of savings and loan associations in the nation's payments
mechanism is growing. The President's Commission on Financial
Institutions and others have made proposals to expand the powers of
savings and loan associations. The close relationship between banking
and operation of savings and loan associations would become even closer
should these proposals be implemented. Should this trend continue to
the point where savings and loan associations both accept demand
deposits and engage in the business of making commercial loans, savings
and loan-associations would actually become "banks" for purposes of the
[BHCA]."47
The Board in American Fletcher was not yet ready to bestow the title of
"bank" upon savings and loan associations.
The prohibitions of section
3(d) were inappropriate to the acquisition of Southwest, an Arizona
savings and loan association, by American Fletcher, an Indiana bank
holding company.
A reading of the Board's Order gives every indication
that but for financial concerns and a Board "go slow" policy respecting
nonbank acquisitions, the Board was prepared to sanction cross-industry
27
and interstate acquisitions of this kind.
However, any such interpretation was voided in the Board's decision
regarding an application by D.H. Baldwin Co., Cincinnati, Ohio, to retain
the shares of Empire Savings, Building and Loan Association, Denver,
Colorado, a state-chartered savings and loan association.
48
In D.H.
Baldwin the Board went beyond the narrow question of the facts unique to
the particular case and considered whether bank holding company
affiliation with savings and loan associations would in general be a
"proper incident to banking". The Board reaffirmed its decision in
American Fletcher that the operation of a savings and loan association is
closely related to banking.
However, the Board was unable to conclude
that such operations were a proper incident to banking.
In support of
its conclusion in this regard, the Board voiced several concerns relating
to:
(1) the issue of regulatory conflict and the problem of determining
the permissible scope of savings and loan association activities as
conducted by a bank holding company affiliate; (2) the possible erosion
of institutional rivalry between banks and ■ savings and loan associations
under common ownership; and (3) the possible undermining of the
prohibitions on interstate banking contained in section 3(d) of the BHCA.
*
Again, as it did in 1972, the Board left it for Congress to decide
whether bank and savings and loan association affiliation is permissible
and whether such near-banks as savings and loan associations should be
treated as "banks" or "nonbanks" for purposes of the BHCA.
The issue as to whether thrifts should be regarded as "banks" or
"nonbanks" for purposes of the BHCA remained dormant after D.H. Baldwin
until 1980. Such institutions were granted expanded powers pursuant to
the Monetary Control Act.
Under the act, federally chartered savings and
28
loan associations were authorized to issue NOW accounts, which function
as the equivalent of a checking account at a commercial bank.
the asset powers of thrifts were also expanded.
associations were empowered to:
Morever,
Savings and loan
(1) invest up to 20 percent of their
assets in commercial real estate loans, commercial paper and corporate
debt securities, and loans for personal, household, or family purposes;
(2) engage in credit card operations; and (3) apply for trust powers.
Further, the Monetary Control Act authorizes federal mutual savings banks
to make commercial, corporate, or business loans up to 5 'percent of
assets and to accept demand deposits in connection with such loan
relationships.
49
Given these expanded powers of thrifts, was the Board willing to regard
them as "banks" under the BHCA?
The answer to this query came in the
Board's discussion in the Interstate/Scioto case.^
In
Interstate/Scioto, a bank holding company sought to acquire a
state-chartered savings and loan association.
the Order are worthy of note.
Two significant aspects of
First, the Board asserted, in line with
its reasoning in First Bancorporation/Beehive (infra) that, for purposes
of the BHCA, NOW deposits are the equivalent of demand deposits,
notwithstanding the fact that institutions accepting such deposits
usually reserve the right to prior notice of withdrawal, a right, which,
in practice, is not often exercised.
Thus, in conformance with its
obligation to "look to the substance of the transaction", the Board could
no longer justify maintaining a regulatory distinction between NOW
deposits and demand deposits for BHCA purposes.
Secondly, Scioto agreed to limit its commercial lending activities so
as to achieve parity with federally chartered thrift institutions.
By so
doing, the Board's consideration of the application could proceed under
29
the standards contained in section 4(c)(8).
In acting upon the application, the Board was forced to reconsider its
position relative to the potential adverse effects of bank/thrift
affiliation.
In approving the
application, the Board stated that its
decision "does not overrule its conclusion...that, as a general matter,
the operation of a thrift institution by a bank holding company is not a
proper incident to banking."^
The Board found compelling public
benefits serving to outweigh the possible adverse effects of bank/thrift
affiliation.
Absent these public benefits, it is unlikely that such an
application would have been entertained by the Board in the first
•
*
52
instance.
The Board's declaration that NOW deposits are "demand deposits" for
BHCA purposes was first articulated in First Bancorporation/Beehive,
53
wherein a bank holding company sought to acquire a Utah industrial loan
company.
Beehive proposed to engage in lending activities, including
commercial lending activities, and to accept NOW deposits, such powers
having been authorized for Utah industrial loan companies.
Under
Regulation Y, the acquisition of an industrial loan company is
permissible so long as ' the institution does not both accept demand
deposits and engage in commercial lending.
54
Thus, the issue raised was
whether an institution that accepts NOW deposits and engages in
commercial lending should be a bank under section 2(c).
The Board noted that while institutions accepting NOW deposits reserve
the right to require between 14-30 days' prior notice of withdrawal, in
practice the right is rarely invoked:
"Indeed, for purposes of section
2(c), the Board believes that until the institution invokes the notice
requirement, the depositor has a right to withdraw funds on demand. '
Accordingly, a nonbank subsidiary of a bank holding company may not
30
accept NOW deposits and also engage in the business of making commercial
loans, for such institutions are "banks" for BHCA purposes.
Having concluded that the combination of accepting NOW deposits and
making commercial loans would qualify an institution as a "bank", the
Board sought to distinguish the activities of savings and loan
associations and savings banks from commercial banks.
The basis on which
savings and loan associations and savings banks were distinguished from
"banks" reflected the fact that such institutions had historically
concentrated their lending in home mortgages and, as a result, their
involvement in commercial lending activities was generally quite
limited.of course, the Board’s rationale in the matter implies that in
particular circumstances savings and loan associations and savings banks
might be deemed to be "banks".
Morever, what would serve to distinguish
state-chartered savings and loan associations and savings banks from
"banks" in those states which confer on such institutions broader lending
powers than those possessed by federally chartered thrifts?
Apparently,
in harmony with the Board’s decision in First Bancorporation/Beehive, any
NOW deposit-taking thrift that engages in commercial lending activities
beyond those of federally chartered thrifts is a "bank” for BHCA
purposes.
As in Interstate/Scioto, the Board in First Bancorporation/Beehive
narrowed the scope of its approval by conditioning the decision.
The
Board stipulated that NOW deposits to be accepted by Beehive would be
subject to interest rate limitations and reserve requirements that apply
to organizations covered by the Monetary Control Act, for to do otherwise
would undermine the objectives of the act by encouraging the growth of
transaction balances outside the purview of Regulations D and Q.
The
31
Board was concerned that the acceptance of NOW deposits by affiliates of
bank holding companies would divert deposits away from institutions
affected by such Regulations."^
Following both First Bancorporation/Beehive and Interstate/Scioto, the
Board considered the application by BankEast Corporation, Manchester, New
Hampshire, to acquire Portsmouth Trust Company, Portsmouth, New
Hampshire, a New Hampshire guaranty savings bank.
banks are unique to New Hampshire.
58
Guaranty savings
They possess many of the same powers
as mutual savings banks, except they have, under state law, broader
commercial real estate lending powers than those of federally chartered
thrifts.
59
Given the precedents of First Bancorporation/Beehive and
Interstate/Scioto, the Board indicated that it would approve the
acquisition of Portsmouth Trust Company under section 4(c)(8) only on the
condition that Portsmouth limit its commercial lending activity to that
currently permissible for federally chartered thrift institutions.
The most recent statement by the Board regarding the issue of
bank/thrift affiliation came in Citicorp/Fidelity.^ *
The Board, in
.
conditionally approving the proposal by Citicorp, New York, New York, to
acquire Fidelity Federal Savings and Loan Association of San Francisco,
San Francisco, California, again reiterated its position that thrifts are
not "banks" under the BHCA.
In Citicorp/Fidelity the Board supported
this position through reliance on two main arguments.
First, the Board noted that the lending activities of federal savings
and loan associations have historically been highly specialized.
Further, under the existing statutory and regulatory provisions (i.e.,
pre-Garn-St. Germain), such institutions continue to have their loan
portfolios concentrated in home mortgages.
32
Secondly, the Board noted the design by Congress of a separate and
independent statutory structure for regulation of federal savings and
loan associations and their holding companies.
Moreover, Congress, in
constructing the BHCA, included federal savings and loan associations
within the definition of thrift institution under section 2(i) of the
act.
This, the Board stated, provided evidence of Congress’ intent not
to have federal savings and loan associations regarded as "banks" under
the BHCA.62
As in Interstate/Scioto, it is unlikely that the Board would have
approved the Citicorp application had it not been for the fact that
Fidelity Federal Savings and Loan Association was a failed institution.
By its acquisition, Citicorp was to breathe new competitive vigor into a
dormant institution.
Absent the compelling public benefits found by the
Board, the application would
probably have been denied.
63
Now that the Board’s focus has shifted to the commercial lending
capabilities of thrifts (NOW deposits being viewed as the equivalent of
demand deposits), what would be the impact of legislation that broadens
further the commercial lending powers of thrifts?
Garn-St. Germain provides for new lending powers for federally
chartered thrifts.
64
Under the legislation, savings and loan
associations are permitted to originate commercial loans up to 5 percent
of their assets up to January 1, 1984.
A federally chartered savings
bank is authorized to originate commercial loans up to 7.5 percent of
assets.
After January 1, 1984, both savings and loan associations and
savings banks would be able to commit up to 10 percent of assets in
direct commercial loans.
33
Since the Board’s position articulated in Interstate/Scioto,
First Bancorporation/Beehive, BankEast/Portsmouth, and Citicorp/Fidelity
revolves around the then existing limited commercial lending powers of
federally chartered thrifts as being determinative as to the proper
classification of "banks" and "nonbanks" under the BHCA, any legislation
that broadens thrift powers would necessitate that the Board reevaluate
its position.
Indeed, it might well have been that enactment of the
legislation would have undermined the basis for the existing exemption of
thrift holding companies from the BHCA.
It appeared in keeping with
previously enunciated Board principles, that "to the extent regulation is
necessary at all, institutions providing the same services should be
subject to substantially the same regulation in providing these services,
regardless of their form of organization".** Legislation seeking to
significantly broaden the commercial lending powers of thrifts would
occasion the Board’s reappraisal of the applicability of the BHCA to
companies owning thrifts in view of the BHCA’s purposes of maintaining a
separation between banking and commerce and in preventing undue
concentrations of banking resources.
Congress, apparently, was aware of the dilemma the Board would have
encountered had it merely expanded the commercial lending powers of
thrifts without indicating an intent to exclude federal thrifts from the
definition of "bank".
Thus, Congress amended section 2(c).
Section 333
of Garn-St. Germain expressly excludes from the definition of "bank" "an
institution the accounts of which are insured by the Federal Savings and
Loan Insurance Corporation or an institution chartered by the Federal
Home Loan Bank Board".
Even though thrifts, exercising all the powers
authorized under Garn-St.Germain, may begin to resemble commercial banks
to a significant extent, they would not be deemed "banks" for the
purposes of the BHCA.1**
34
Section V. Conclusion
The history of what is a "bank' under the BHCA has reflected a number
of significant factors.
First, the Board appears to strive to remain
faithful to the purposes and objectives of the BHCA.
As noted, the major
purposes were to prevent an undue concentration of resources, especially
business credit, and to maintain the separation of banks from companies
not closely related to banking.
Secondly, this review has highlighted the difficulties encountered by
the Board in assessing proposals by bank holding companies to acquire
bank-like organizations.
This difficulty is revealed in Board rulings,
that, in some instances, define an organization to be a "nonbank", yet
suggest that permitting its establishment or acquisition may run counter
to the interstate banking prohibitions of the BHCA.
The Board's assessments of nonbank proposals appear to be greatly
influenced by considerations relative to monetary policy.
Any proposal
which has the effect of making monetary control more difficult is
unlikely to be approved absent compelling public benefits.
This view is
projected in First Bancorporation/Beehive wherein the industrial loan
company was subjected -to reserve and interest rate requirements similar
to those for NOW deposits held by depository institutions under the
Monetary Control Act, notwithstanding the fact that Congress did not see
fit to extend such requirements to industrial loan companies offering
such accounts.
This article has captured some sense of the "regulatory dialectic."
According to Edward Kane, the regulatory dialectic contemplates the
interaction of political and economic forces in a regulated environment.
Within this context, the regulatee seeks to avoid or circumvent costly
regulation, which, in turn, calls for re-regulation on the part of the
regulators.
35
Wasn’t Gulf & Western seeking to avoid the regulatory burden of
becoming a bank holding company by structuring its acquired bank's
activities so that it should not be deemed a "bank"?
Wasn’t Wilshire Oil
Company also seeking to escape the BHCA’s requirements by attempting to
convert its bank’s accounts into something other than demand deposit
accounts?
These are but a few examples of the ongoing regulatory
dialectic.
Determining what is a "bank” is likely to become more and more
difficult as the winds of financial innovation buffet the waves.
The
increasing rate of financial innovation is a product of many factors,
significant among which are:
(1) the response of individuals in and out
of the financial sector to high rates of inflation; (2) the increasing
rate of technological innovation, which has an impact on the speed at
which information is processed and communicated; and (3) the prevailing,
yet evolving, regulatory structure, a structure which is rooted in the
theology of the 1930’s.
The forces influencing financial innovation are not likely to abate.
Nonbank institutions may become more bank-like.
As this occurs it will
become increasingly difficult for the Board to maintain the integrity of
the BHCA.
Difficulties arise when the deposit-taking and commercial
lending functions are lodged in separate affiliates.
This creates
supervisory problems in maintaining the separability of the affiliates.
These problems are likely to grow more intractable given the rate of
technological innovation and the desire on the part of institutions to
avoid costly regulation.
36
Footnotes
2Nico Jacobellis v. Ohio 378 U.S. 184, 197 (1964).
2
Walter B. Wriston, "Bank 'n' Burger”; Samuel H. Armacost, "The
Fettering of American Banking"; and Willard C. Butcher, "When is a Bank
not a Bank," All articles appeared in Euromoney (October 1981).
3
See: Wilshire Oil Company of Texas v. Board of Governors of the
Federal Reserve System, 668 Fed. 2d 732 (3d Cir. 1981).
4
Paul A. Samuelson, Economics, Ninth Edition, (McGraw-Hill, 1973), p.
294.
5Ibid., p. 292.
^In a different context, the U.S. Supreme Court attested to the
"uniqueness" of ' commercial banks in deciding upon the legality of a bank
merger under the federal antitrust laws. The Court noted banks' unique
ability to accept demand deposits and the role banks play in the
provision of business credit. In determining that the cluster of
products and services denoted by the term "commercial banking" composed a
distinct line of commerce for bank merger analysis, the Court stated:
"Some commercial banking products or services are so distinctive they
are entirely free of effective competition from products or services of
other financial institutions; the checking account is in this
category."
(U.S. v. The Philadelphia National Bank, 374 U.S. 321, 356 (1963).)
?See:
Board of Governors of the Federal Reserve System,
30th Annual Report, 1943 (1944), p. 36.
8lbid., p. 37.
9
Bank Holding Company Act of 1956, S. Rept. 1095, 84 Cong., 1st Sess.
l%ank Holding Company Act Amendments of 1966, S. Rept. 1179, 89 Cong.,
2d Sess.
'*See letter dated June 1, 1970, from Governor Robertson to Senator
Sparkman.
^Wall Street Journal, August 10, 1982, p. 38.
13
In addition to the BHCA, the Board has the responsibility of
administering other legislation which necessitates from time to time a
definition of certain terms such as "demand deposits".
(See, for
example, Regulations D and Q.) Because these other Regulations
administered by the Board were formulated for different purposes, it is
possible for the term "demand deposits" to be defined one way for
purposes of the BHCA and in some other manner for other regulatory
purposes.
37
14
See letter dated July 1, 1971, from Kenneth A. Kenyon, Deputy
Secretary, Board of Governors, to Biaggio M. Maggiacomo, President,
Greater Providence Deposit Corporation.
15
Ibid.
ISee letter dated July 29, 1971, from Thomas J. O’Connell, General
Counsel, Board of Governors, to Ernest N. Agresti, Esq.
17Ibid.
188See letter dated June 8, 1972, from Michael A. Greenspan, Assistant
Secretary, Board of Governors, to Laurence H. Stone, Vice President and
General Counsel, Federal Reserve Bank of Boston.
19
Commercial loans comprised only lh percent of Boston Safe Deposit
and Trust Company’s assets at December 31, 1971.
20
Boston Safe Deposit and Trust Company had $8 million in Fed funds
sold at December 31, 1971.
21
Another case involving Boston Safe Deposit and Trust Company is of
some importance. Boston Safe Deposit and Trust Company planned to
implement a so-called Trust Banking Program, which would provide
individual clients with various personal financial services, including a
personal unsecured line of credit drawn upon by check. In addition, the
line would be offered in connection with the American Express Card
Program, whereby the line would be used to pay charges incurred through
the use of the American Express Card. This service was to be offered to
individuals with a maximum line of credit of $5,000.
The Board decided that Boston Safe Deposit and Trust Company would not
be a "bank" upon implementation of the program because (1) the maximum
amount of such loans under the program would be only $5,000 and (2)
Boston Safe Deposit and Trust Company planned to take measures to ensure
that the proceeds of loans under the program would be used only for
personal purposes (i.e., noncommercial . purposes).
(See letter dated May
19, 1978, from Neal L. ■ Peterson, General Counsel, Board of Governors, to
Joshua M. Berman, Esq.)
22
See letter dated March 11, 1981, from James McAfee, Assistant
Secretary, Board of Governors, to Robert C. Zimmer, Esq.
23
Letter dated December 10, 1982, from William W. Wiles, Secretary,
Board of Governors, to William M. Isaac, Chairman, Federal Deposit
Insurance Corporation.
24
Ibid. The Board also concluded that the acquisition of "nonbank
banks" had become a vehicle to evade the BHCA and that it was necessary
to limit the scope of such acquisitions by broadening the meaning of
"commercial loans" as quoted in the text.
25
Under the original BHCA, a company had to own or control two or more
banks to qualify as a bank holding company. The 1970 Amendments to the
BHCA eliminated this loophole.
38
26
Final Decision and Order, p. 13.
2?Ibid., p. 18.
28
The Board's emphasis on economic reality has implications for
thrifts. Whether thrifts are "banks" is discussed in the following
section.
29
Wilshire Oil Company of Texas v. Board of Governors.
Petitioner.
30
Brief for
Wilshire Oil Company of Texas v. Board of Governors, 668 Fed. 2d at
735.
31
Ibid, at 738. The Court of Appeals distinguished this case from the
circumstances surrounding the Gulf & Western acquisition. In the Gulf &
Western case, Fidelity. the acquired'bank, made a substantial change in
its banking operations by divesting its commercial loan portfolio and by
committing not to engage in making commercial loans. Thus, the Court
apparently sanctioned ex post the Board's decision in Gulf & Western that
Fidelity is not a "bank" for BHCA purposes.
32
Credit balances arise from, and may be used to settle, a variety of
transactions. Sources of such balances may include, for example, the
purchase of bills of exchange from customers, the collection of bills of
exchange, the sale of securities by customers, the collection of interest
payments and dividends on securities held for customers' accounts.
Credit balances are primarily distinguishable from demand deposits
because they arise only from customers who utilize other services of the
New York Investment Company. As such, they are said to be "incidental
to" those other services.
(Credit balances at New York Investment
Companies bear a striking resemblance to the deposit-taking capabilities
of trust companies under section 225.4(a)(4) of Regulation Y. Trust
companies thereunder may not accept deposits other than those 'that may be
incidental to their trust activities.)
33
The general powers ■ of New York Investment Companies are enumerated at
section 508 of Article XII of the New York Banking Law.
(4 McKinney's Consolidated Laws of New York, pp. 563-66). Section 509 of
Article XII provides that:
"... nothing contained in this article shall prevent an investment
company from maintaining for the account of others credit balances
incidental to, or arising out of, the exercise of its lawful powers..."
*^58 Federal Reserve Bulletin 311-13 (March 1972).
35
Section 4(c)(9) exempts from the general nonbanking prohibitions of
section 4 of the BHCA investments or activities of foreign bank holding
companies that conduct the greater part of their business outside the
U.S.
36
£5ee letter dated November 8, 1971, from Tynan Smith, Secretary, Board
of Governors, to H. B. Jamison, Assistant Vice President, Federal Reserve
Bank of San Francisco.
39
3^61 Federal Reserve Bulletin 449-51 (July 1975).
qo
63 Federal Reserve Bulletin 595-603 (June 1977).
3%6 Federal Reserve Bulletin 759 (September 1980).
AO
63 Federal Reserve Bulletin 599 (June 1977).
41
Monetary policy concerns have been important factors in bank holding
company proposals aside from the acquisition of thrifts. See, for
example, the Board's Order regarding' a proposal by Orbanco Financial
Services Corporation, Portland, Oregon, to issue market certificates that
would possess certain transaction account features under the proposal's
implementation (68 Federal Reserve Bulletin 198-200 (March 1982)). Also,
see Citicorp /Citi Services, Inc., 63 Federal Reserve Bulletin 416-19
(April 1977).
42
Section 408 of the National Housing Act (12 U.S.C. section 1730a).
43
See section 225.4(a) of Regulation Y for the list of permissible
nonbank activities.
44
58 Federal Reserve Bulletin 717 (August 1972).
4560 Federal Reserve Bulletin 868-74 (December 1974).
46ibid., p. 871.
47ibid., p. 869.
48
63 Federal Reserve Bulletin 280-87 (March 1977).
.
See: Economic Perspectives, September/October 1980, Federal Reserve
Bank of Chicago, especially pp. 18-22.
49
“^68 Federal Reserve Bulletin 316-18 (May 1982).
51Ibid., p. 317.
52
Indeed, the public benefits associated with the proposal center on
the fact that Scioto was in jeopardy of failure, posing a threat to the
Ohio Guarantee Fund as the insurer of Scioto's deposits, and the Ohio
economy. The Board also imposed other conditions on the operations of
Scioto which would tend to narrow the scope of the Board's decision.
(See: ibid., pp. 317-18.) It has been suggested that the Board's action
in this regard is a result of the political sensitivity of the
bank/thrift affiliation issue.
(See: John D. Hawke, Jr., "Humpty Dumpty
Syndrome Alive and Well at the Fed," Legal Times, April 19, 1982.)
5368 Federal Reserve Bulletin 253-55 (April 1982).
34Section 225.4(a)(2) of Regulation Y.
3368 Federal Reserve Bulletin 253 (April 1982).
40
p. 254, note 5.
“?As noted by Hawke, op. cit., the Order ends without the Board
explaining why it is any more "adverse", or subversive of the goals of
the Monetary Control Act, for a bank holding company to own an industrial
loan company that offers NOW accounts free of Regulations D and Q, than
it it for such a company not affiliated with a bank holding company. We
note that the Board's theme since passage of the MCA has been that all
transaction accounts wherever located should be subjected to the
requirements of Regulations D and Q. Within this theme the Board has
argued for legislation that would impose reserve requirements on money
market mutual funds that possess transaction-type characteristics.
(See:
"Financial Innovation and Monetary Policy", Federal Reserve Bulletin,
vol. 68 (July "982), pp. 393-400.)
CO
68 Federal Reserve Bulletin 379-82 (June 1982).
59
Guaranty savings banks are authorized to invest up to 90 percent of
deposits in commercial real estate loans compared with the then existing
20 percent ceiling on federally chartered thrifts (4 New Hampshire
Revised Statutes Annotated, Chapter 387 (1979).)
(The ceiling on
federally chartered thrifts is a percentage of assets, not deposits, but
asset and deposit totals for such organizations should bear a strong
correlation with one another.)
^The Board, in approving the acquisition, was not contravening its
position taken in D.H. Balwin regarding bank/thrift affiliation. The
Board had previously noted the unique structural and competitive
circumstances existing in New Hampshire and has sanctioned bank/thrift
affiliations in that context.
(See: Profile Bancshares, Inc./First
National Bank of Rochester, 61 Federal Reserve Bulletin 901-3 (December
1975).)
61 68 Federal Reserve Bulletin 656-71 (October 1982).
62ibid., pp. 660-61.
633The conditions placed on Fidelity Federal Savings and Loan
Association's operations were designed to insure its separate operation
as a savings and loan association.
(See ibid., p. 659.)
64
See Title III of the act, section 325.
65
"Statement by Paul A. Volcker, Chairman, Board of Governors, before
the Committee on Banking, Housing, and Urban Affairs, October 29, 1981,"
Federal Reserve Bulletin, vol. 67 (November 1981), pp. 835-45.
^In addition to the expanded commercial lending powers already
referred to, Garn-St. Germain authorizes, among other things, the
acceptance of demand deposits; investment in nonresidential real property
up to 40 percent of assets; investment in consumer loans up to 30 percent
of assets; and investment in personalty up to 10 percent of assets.
41
Edward J. Kane, "Accelerating Inflation, Technological Innovation,
■ id the Decreasing Effectiveness of Banking Regulation,"
tle Journal of Finance, vol. 36 (May 1981), pp. 355-67.
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