oversight

Bank Holding Company Act: Characteristics and Regulation of Exempt Institutions and the Implications of Removing the Exemptions

Published by the Government Accountability Office on 2012-01-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to Congressional Committees




January 2012
               BANK HOLDING
               COMPANY ACT
               Characteristics and
               Regulation of Exempt
               Institutions and the
               Implications of
               Removing the
               Exemptions




GAO-12-160
                                            January 2012

                                            BANK HOLDING COMPANY ACT
                                            Characteristics and Regulation of Exempt
                                            Institutions and the Implications of Removing the
                                            Exemptions
Highlights of GAO-12-160, a report to
congressional committees




Why GAO Did This Study                      What GAO Found
The Bank Holding Company Act of             The 1,002 exempt financial institutions make up a small percentage of the
1956 (BHC Act) establishes the legal        assets of the overall banking system—about 7 percent—and include
framework under which bank holding          industrial loan corporations (ILC), limited-purpose credit card banks,
companies—that is, companies                municipal deposit banks, trust banks with insured deposits, and savings and
which own or control banks—operate          loans (S&L). Although exempt from the BHC Act, S&L holding companies are
and restricts the type of activities that   regulated by the Federal Reserve System Board of Governors (Federal
these companies may conduct. The            Reserve) under the Home Owners’ Loan Act as amended. Excluding S&Ls,
BHC Act excludes from these                 the number of exempt institutions drops to 57 that comprise less than 1
restrictions certain companies
                                            percent of banking system assets and there is a 3-year moratorium on the
because the financial institutions
                                            approval of federal deposit insurance on select exempt institutions that ends
they own are exempt from the BHC
Act definition of “bank”. However,
                                            in 2013. These institutions vary by size, activities, and risks. Larger
these exempt institutions are eligible      institutions such as ILCs provide banking services similar to those of
for FDIC insurance raising questions        commercial banks and carry many of the same risks. Other exempt
about continuing to exempt their            institutions are smaller, provide only a few services such as credit card loans
holding companies from BHC Act              and related services, and thus have lower risk profiles.
requirements.                               Federal regulation of the holding companies of exempt institutions and their
The Dodd-Frank Wall Street Reform           affiliates varies. The Federal Deposit Insurance Corporation (FDIC) and
and Consumer Protection Act directs         Office of the Comptroller of the Currency (OCC) oversee ILCs, credit card
GAO to study the implications of            banks, and trust banks, and focus their supervision on the institutions, not the
removing the exemptions. This               parent holding companies. They examine the institutions for safety and
report examines (1) the number and          soundness and for potential conflicts of interest in transactions with affiliates
general characteristics of certain          and the holding company. In contrast, the Federal Reserve oversees bank
institutions in the U.S. banking            and, more recently, S&L holding companies using consolidated supervision
system that are exempt from the             that allows examiners to look at all entities and affiliates in the structure. OCC
definition of bank in the BHC Act, (2)      officials and representatives of exempt institutions viewed the current
the federal regulatory system for           oversight was sufficiently robust. FDIC officials indicated that supervision of
exempt financial institutions, and (3)      the exempt institutions themselves was adequate, but noted that
potential implications of subjecting        consolidated supervision authorities provide important safety and soundness
the holding companies of exempt
                                            safeguards. Officials from the Federal Reserve and Department of the
institutions to BHC Act requirements.
                                            Treasury (Treasury) stated that the exemptions should be removed, given
GAO analyzed data and exams from
exempt institutions and regulators,
                                            that exempt institutions have access to FDIC insurance and the holding
and examined regulators’ guidance           companies of most types of exempt institutions are not subject to
and policies. GAO also interviewed          consolidated supervision.
regulators and officials from 31            The implications of subjecting exempt institutions and their holding
exempt financial institutions.              companies to the BHC Act vary. While many officials from the exempt
We provided a draft of this report to       institutions owned by commercial holding companies said that the institutions
the relevant agencies. Treasury             would be divested, data suggest that removing the exemptions would likely
provided written comments and we            have a limited impact on the overall credit market given the overall market
received technical comments from            share of exempt institutions is small. Views varied on how removing the
other agencies which we                     exemptions would improve safety and soundness and financial stability.
incorporated as appropriate.                Some officials from exempt institutions said that financial stability could be
                                            adversely affected by further concentrating market share. Federal Reserve
View GAO-12-160. For more information,
contact A. Nicole Clowers 202-512-8678 or
                                            officials noted that institutions that remain exempt are not subject to
clowersa@gao.gov.                           consolidated supervision but could grow large enough to pose significant
                                            risks to the financial system, an issue they plan to continue to watch.
                                                                                    United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 7
               Exempt Financial Institutions Vary by Size, Ownership, Activities,
                 and Risks                                                              14
               Federal Regulation of Exempt Institutions Differs across
                 Regulators, and Views on Regulatory Adequacy Are Mixed                  25
               Removing BHC Act Exemptions Could Have Varying Implications               33
               Agency Comments and Our Evaluation                                        45

Appendix I     Objectives, Scope, and Methodology                                        46



Appendix II    Financial Institutions Exempt under the Bank Holding
               Company Act and the Holding Company Commercial Status                     53



Appendix III   Comments from the Department of the Treasury                              57



Appendix IV    GAO Contact and Staff Acknowledgments                                     59



Tables
               Table 1: Primary Federal Banking Regulators and Their Basic
                        Functions, as of January 2012                                     7
               Table 2: Certain BHC Act Exempt Institutions and Their Federal
                        Regulators                                                       14
               Table 3: Commercial Status of Holding Companies Owning ILCs,
                        Limited-Purpose Credit Card Banks, Municipal Deposit
                        Banks, and Trust Banks, as of December 31, 2011                  20
               Table 4: Percentage of Total Loans and Leases on the Balance
                        Sheets of ILCs, Limited-Purpose Credit Card Banks,
                        Municipal Deposit Banks, and Trust Banks, as of June 30,
                        2010                                                             37
               Table 5: HHI of Concentration among FDIC-insured Institutions in
                        Loan Markets, 2010                                               39
               Table 6: Industrial Loan Corporations, as of September 30, 2011           53




               Page i                                    GAO-12-160 Bank Holding Company Act
          Table 7: Limited-Purpose Credit Card Banks, as of September 30,
                   2011                                                                             55
          Table 8: Municipal Deposit Banks, as of September 30, 2011                                55
          Table 9: Federal Chartered Trust Banks, as of September 30, 2011                          56


Figures
          Figure 1: Geographic Distribution of ILCs, Limited-Purpose Credit
                   Card Banks, Trust Banks, and Municipal Deposit Banks,
                   as of September 30, 2011                                                         18
          Figure 2: Average Equity-To-Total Assets Ratios for Holding
                   Companies of ILCs and Limited-Purpose Credit Card
                   Banks Compared with Those of Bank Holding Companies,
                   2006-2010                                                                        24


          Abbreviations
          BHC Act                  Bank Holding Company Act of 1956
          Dodd-Frank Act           Dodd-Frank Wall Street Reform and Consumer
                                   Protection Act
          GLBA                     Gramm-Leach-Bliley Act
          FDI Act                  Federal Deposit Insurance Act
          FDIC                     Federal Deposit Insurance Corporation
          Federal Reserve          Federal Reserve System Board of Governors
          FSOC                     Financial Stability Oversight Council
          HHI                      Herfindahl-Hirschman Index
          HOLA                     Home Owners’ Loan Act
          ILC                      industrial loan corporation
          OCC                      Office of the Comptroller of the Currency
          OTS                      Office of Thrift Supervision
          S&L                      savings and loans
          SEC                      Securities and Exchange Commission
          SOD                      Summary of Deposits
          Treasury                 Department of the Treasury


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          Page ii                                            GAO-12-160 Bank Holding Company Act
United States Government Accountability Office
Washington, DC 20548




                                   January 19, 2012

                                   The Honorable Tim Johnson
                                   Chairman
                                   The Honorable Richard C. Shelby
                                   Ranking Member
                                   Committee on Banking, Housing,
                                     and Urban Affairs
                                   United States Senate

                                   The Honorable Spencer Bachus
                                   Chairman
                                   The Honorable Barney Frank
                                   Ranking Member
                                   Committee on Financial Services
                                   House of Representatives

                                   More than 7,500 banks insured by the Federal Deposit Insurance
                                   Corporation (FDIC) were operating in 2011, most of them owned or
                                   controlled by bank holding companies regulated under the Bank Holding
                                   Company Act of 1956 (BHC Act). 1 The BHC Act establishes the legal
                                   framework under which bank holding companies operate and establishes
                                   their supervision, which puts bank holding companies and their banking
                                   and nonbanking interests under the authority of the Board of Governors of
                                   the Federal Reserve System (Federal Reserve). The BHC Act also limits
                                   the types of activities that bank holding companies may conduct, either
                                   directly or through nonbank subsidiaries. The restrictions, which are
                                   designed to maintain the general separation of banking and commerce in
                                   the United States, only allow bank holding companies to engage in
                                   banking activities; to own and manage banks; and to engage in those
                                   activities that the Federal Reserve has determined to be “closely related
                                   to banking,” such as extending credit and servicing loans and performing




                                   1
                                    Pub. L. No. 84-511, 70 Stat. 133 (1956). Bank holding companies are companies that
                                   own or control a bank. 12 U.S.C. § 1841(a)(1). The BHC Act defines a bank as any of the
                                   following: (1) an insured bank or (2) an institution that both (a) accepts demand deposits
                                   or deposits that the depositor may withdraw by check or similar means for payment to
                                   third parties or others and (b) is engaged in the business of making commercial loans. 12
                                   U.S.C. § 1841(c)(1).




                                   Page 1                                             GAO-12-160 Bank Holding Company Act
appraisals of real estate and tangible and intangible personal property,
including securities.

For various reasons, the BHC Act exempts from regulation certain
companies that own depository institutions; these subsidiaries are not
defined as banks for purposes of the BHC Act and thus the companies
that own them are not considered bank holding companies and are not
required to comply with the BHC Act’s restrictions. Only one type of these
companies—savings and loan holding companies—is subject to
regulation at the holding company level, as follows.

•   Industrial loan corporations. Industrial loan corporations (ILC) are
    limited-service financial institutions that make loans and raise funds
    by selling certificates called “investment shares” and by accepting
    deposits. ILCs are distinguished from finance companies because
    ILCs accept deposits in addition to making consumer loans. ILCs also
    differ from commercial banks because most ILCs do not offer demand
    deposit (checking) accounts. 2

•   Limited-purpose credit card banks. Limited-purpose credit card banks
    are generally restricted to credit card lending, can maintain only one
    office that accepts deposits, cannot accept demand deposits or
    transaction accounts, do not accept savings or time deposits of less
    than $100,000 (unless used as collateral for extensions of credit), and
    do not engage in the business of making commercial loans (other
    than small business loans).

•   Municipal deposit banks. Municipal deposit banks are state-chartered
    institutions that are wholly owned by thrift institutions or savings banks
    and restrict themselves to acceptance of deposits from thrift




2
 An exempt ILC either must not engage in any activity it was not lawfully engaged in as of
March 5, 1987, or must be organized under state law either extant or contemplated by the
state legislature as of March 5, 1987, requiring ILCs to be FDIC insured and meet one of
the following conditions: (1) not accept demand deposits, (2) have total assets of less than
$100 million, or (3) not have been acquired after August 10, 1987. 12 U.S.C. §
1841(c)(2)(H).




Page 2                                              GAO-12-160 Bank Holding Company Act
    institutions or savings banks, deposits arising out of the corporate
    business of their owners, and deposits of public monies. 3

•   Savings and loans or thrifts. Savings and loans (S&L) or thrifts are
    institutions that traditionally accepted deposits to channel funds
    primarily into residential mortgages. More recently, these institutions’
    charters have been expanded to allow them to provide commercial
    loans and a broader range of consumer financial services. 4 As
    discussed in detail later in this report, S&L holding companies are
    regulated by the Federal Reserve Board and are subject to
    restrictions on the activities they conduct.

•   Trust banks. Trust banks are institutions that function solely in a
    fiduciary capacity. All or substantially all of the deposits of such
    institutions must be in trust funds. Trust banks must not permit insured
    deposits to be marketed through affiliates and may not accept
    demand deposits. 5

While these financial institutions are not considered banks under the BHC
Act, each can offer deposit insurance under the Federal Deposit Insurance




3
 The BHC Act does not exempt municipal deposit banks from the definition of “bank.”
Instead, companies that own or control municipal deposit banks are not defined as bank
holding companies. 12 U.S.C. § 1841(a)(5)(E). For purposes of this report, however,
municipal deposit banks are referred to as exempt institutions.
4
 The BHC Act defines exempt S&L associations as (1) any federal savings association or
federal savings bank; (2) any building and loan association, savings and loan association,
homestead association, or cooperative bank if such association or cooperative bank is a
member of the Deposit Insurance Fund; or (3) any savings bank or cooperative bank that
was previously deemed by the Director of the Office of Thrift Supervision to be a savings
association under Section 10(l) of the Home Owners’ Loan Act. 12 U.S.C. §§
1841(c)(2)(B) 1841 (j). A residential mortgage is a document signed by a borrower when a
home loan is made that gives the lender a right to take possession of the property if the
borrower fails to pay off the loan.
5
 Trust banks may not obtain payment services or borrowing privileges from the Federal
Reserve. For this study, we identified only those trust banks that fell under the BHC Act
exemption, (12 U.S.C. § 1841(c)(2)(D)) and that accept insured deposits. Serving in a
fiduciary capacity includes serving as trustee, executor, custodian, administrator, registrar
of stocks and bonds, guardian of estates, or committee of estates and incompetents. The
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §
604(i), 124 Stat. 1376,1604 (2010), excluded companies that control limited-purpose trust
savings associations from regulation as S&L holding companies.




Page 3                                               GAO-12-160 Bank Holding Company Act
Act (FDI Act).6 Establishing or acquiring an institution that is not defined as a
bank under the BHC Act is the only avenue for commercial companies to
own depository institutions that are eligible for deposit insurance. However,
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), which was enacted in 2010, included a 3-year moratorium on
approving federal deposit insurance for ILCs, credit card banks, and trust
banks that are directly or indirectly owned or controlled by a commercial
firm.7 In June 2009, the Department of the Treasury (Treasury) submitted a
financial regulatory reform plan to Congress that, among other things,
proposed amending the BHC Act by eliminating these exemptions and
defining these institutions as banks. Treasury proposed that all holding
companies owning an insured depository institution be subject to the BHC
Act restrictions and the Federal Reserve’s supervision.

Section 603 of the Dodd-Frank Act required us to conduct a study on certain
institutions that are exempt from the BHC Act definition of a “bank.” This
report examines (1) the number of these institutions in the U.S. banking
system that are exempt from the definition of bank in the BHC Act and their
general characteristics; (2) the federal regulatory system for the exempt
financial institutions and participants’ views on it; and (3) the potential
implications of subjecting the parents of the exempt institutions to the BHC
Act provisions relating to the types of activities in which such institutions may
engage, the availability and allocation of credit, the stability of the financial
system and the economy, and the safe and sound operations of such
institutions.

To determine the number of certain types of financial institutions that are
exempt from the definition of “bank” in the BHC Act and their general
characteristics, we analyzed data from FDIC, the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), the Office of Thrift
Supervision (OTS) and SNL Financial relating to the number of exempt
institutions, their geographic location, their asset size, and their parent



6
 Enacted in 1999, the Financial Services Modernization Act (the Gramm-Leach-Bliley
Act), Pub. L. No. 106-102, 113 Stat. 1338 (1999), allowed the continued exemption of
ILCs, credit card banks, municipal deposit banks, and trust banks.
7
 Section 603(a) of the Dodd-Frank Act, 12 U.S.C. § 1815 note. A “commercial firm”
derives less than 15 percent of its annual gross revenues from activities that are financial
in nature, as defined in section 4(k) of the BHC Act, or from ownership or control of
depository institutions.




Page 4                                               GAO-12-160 Bank Holding Company Act
holding company. 8 We also interviewed officials from the Federal
Reserve, FDIC, and OCC to obtain their understanding of the exemptions
listed in the BHC Act. To determine whether the exempt institutions were
owned by commercial holding companies, we first collected information
from the federal bank regulators on the parent companies and identified
publicly available information on their various business activities. 9 We
then compared the financial activities listed in Section 4(k) of the BHC Act
to the activities of the parent holding companies to determine the extent
to which financial activities contributed to the companies’ 2010 annual
gross revenue. In accordance with the Dodd-Frank Act, if 15 percent or
more of a company’s revenue was financial, we classified it as
noncommercial. Companies that derived less than 15 percent of their
revenue from financial activities were classified as commercial. We
assessed the reliability of the data we obtained from each of the sources
listed and determined that they were reliable for these purposes.

To describe the federal regulatory system for the exempt financial
institutions, we reviewed 18 examinations of exempt institutions with
assets of $1 billion or more that FDIC and OCC conducted in 2008
through 2011. We judgmentally selected examinations for review based
on the institutions’ asset size, choosing larger institutions because of the
potential risks they posed. The examinations we reviewed included ILCs,
and limited-purpose credit card banks. Our review of examinations did not
include trust banks and municipal deposit banks because none had
assets of more than $1 billion. We reviewed documentation from FDIC,
OCC, and the Federal Reserve about their supervisory practices,
including information from both the Federal Reserve and OCC on how
they planned to carry out their new responsibilities for S&Ls and their
holding companies. 10 We interviewed officials from FDIC, the Federal




8
 SNL Financial is a private database of financial data of banking, financial services,
insurance and real estate.
9
 Under the Dodd Frank Act, we were not required to determine whether the S&L holding
companies were commercial or noncommercial. Certain holding companies owning a
single S&L are exempt from the activity restrictions applicable to other S&L holding
companies.
10
  As of July 21, 2011, the Dodd-Frank Act abolished the Office of Thrift Supervision
(OTS), which had regulated and supervised federally chartered S&Ls and all S&L holding
companies; the Dodd-Frank Act transferred these responsibilities to OCC and the Federal
Reserve, respectively.




Page 5                                               GAO-12-160 Bank Holding Company Act
Reserve, and OCC regarding the supervision of all BHC Act exempt
institutions, as well as S&L and holding company supervision.

To determine the potential effect on the credit markets of subjecting the
parents of exempt institutions to the requirements of the BHC Act, we
analyzed data from the exempt institutions, FDIC, the Federal Reserve,
OCC, the Office of Thrift Supervision (OTS), the Securities and Exchange
Commission (SEC), and SNL Financial, including institutions’
Consolidated Reports of Condition and Income (Call Reports) submitted
to FDIC and Thrift Financial Reports submitted to OTS. 11 We estimated
market shares for each type of exempt institution in various loan markets
for 2010. We also estimated loan market concentration for 2010 using the
Herfindahl-Hirschman Index, a measure that reflects both the number of
firms in the market and each firm’s market share. We assessed the
reliability of the data we obtained from each of the sources listed above
and determined that they were reliable for these purposes.

To analyze other potential implications of subjecting the companies that
own the exempt institutions to regulation under the BHC Act, we
judgmentally selected a number of exempt institutions to interview. We
interviewed representatives from 31 exempt institutions (ILCs, limited-
purpose credit card banks, municipal deposit banks, S&Ls, and trust
banks) selected on the basis of size of the exempt institutions and the
commercial status of holding company. We also interviewed
representatives from the American Bankers Association and the
Independent Community Bankers Association. In addition, we interviewed
representatives from two ILC holding companies that recently became
bank holding companies to obtain their views on bank holding company
supervision from the perspective of a former ILC holding company. We
also interviewed officials from the Federal Reserve, OCC, FDIC, and
Treasury to obtain their views on removing the exemptions. See appendix
I for more information on our scope and methodology.


11
  The Consolidated Reports of Condition and Income (Call Reports) are a primary source
of financial data used for the supervision and regulation of banks. They consist of a
balance sheet, an income statement, and supporting schedules. The Report of Condition
schedules provide details on assets, liabilities, and capital accounts. The Report of
Income schedules provide details on income and expenses. Every national bank, state
member bank, and insured state nonmember bank is required to file a consolidated Call
Report normally as of the close of business on the last calendar day of each calendar
quarter. The specific reporting requirements depend upon the size of the bank and
whether it has any foreign offices.




Page 6                                           GAO-12-160 Bank Holding Company Act
                                         We conducted this performance audit between October 2010 and
                                         January 2012 in accordance with generally accepted government auditing
                                         standards. Those standards require that we plan and perform the audit to
                                         obtain sufficient, appropriate evidence to provide a reasonable basis for
                                         our findings and conclusions based on our audit objectives. We believe
                                         that the evidence obtained provides a reasonable basis for our findings
                                         and conclusions based on our audit objectives.


                                         The U.S. bank regulatory structure is composed of several agencies at both
Background                               the federal and state levels. The specific regulatory structure for a depository
                                         institution is determined by the type of charter the institution chooses.
                                         Depository institution charter types include commercial banks; S&Ls and
                                         savings banks; ILCs, also known as industrial banks; and credit unions.
                                         These charters can be obtained at the state and federal level, except for ILC
                                         charters, which are chartered only at the state level. State regulators help
                                         regulate the institutions they charter, but every institution that offers federal
                                         deposit insurance has a primary federal regulator (see table 1).

Table 1: Primary Federal Banking Regulators and Their Basic Functions, as of January 2012
Regulator            Basic function
OCC                  Charters and supervises national banks and federal S&Ls
Federal Reserve      Oversees state-chartered banks that opt to be members of the Federal Reserve System, bank holding
                     companies, S&L holding companies and their nondepository institution subsidiaries, and any firm designated
                     as systemically significant by the Financial Stability Oversight Council
FDIC                 Oversees state-chartered banks that are not members of the Federal Reserve System, as well as state-
                     chartered savings banks and S&Ls; insures the deposits of all banks and S&Ls that are approved for federal
                     deposit insurance; and resolves all failed insured banks and S&Ls and certain nonbank financial companies
                                         Source: GAO summary of information from OCC, the Federal Reserve, and FDIC.



                                         To achieve their safety and soundness goals, bank regulators establish
                                         capital requirements, conduct onsite examinations and off-site monitoring
                                         to assess a bank’s financial condition, and monitor compliance with
                                         banking laws. Regulators also issue regulations, take enforcement
                                         actions, and close banks they determine to be insolvent.


Regulatory Framework for                 The BHC Act, as amended, contains a comprehensive framework for the
Holding Companies                        supervision of bank holding companies and their nonbank subsidiaries.
                                         Bank holding companies are companies that own or control a bank, as
                                         defined in the BHC Act. Generally, any company that acquires control of
                                         an insured bank or bank holding company is required to register with the
                                         Federal Reserve as a bank holding company. The BHC Act defines


                                         Page 7                                                                GAO-12-160 Bank Holding Company Act
‘‘control’’ of an insured bank to include ownership or control of blocks of
stock, the ability to elect a majority to the board of directors, or other
management prerogative. 12 Regulation under the BHC Act entails, among
other things, consolidated supervision of the holding company by the
Federal Reserve and, as previously discussed, restricts the activities of
the holding company and its affiliates to those that are closely related to
banking or, for qualified financial holding companies, activities that are
financial in nature. In 1999, the Gramm-Leach-Bliley Act (GLBA) provided
that a bank holding company may elect to become a financial holding
company that can engage in a broader range of activities that the Federal
Reserve determines to be financial in nature or incidental to such financial
activity. 13 For example, financial holding companies can engage in
securities underwriting and dealing, but would be prohibited, for example,
from selling unrelated products.

The Home Owners’ Loan Act (HOLA), as amended sets forth the
regulatory framework for S&L holding companies. 14 S&Ls are often part
of holding company structures. Like bank holding companies, S&L
holding companies are subject to restrictions on the activities they
conduct. HOLA permits S&L holding companies to conduct activities that
the Federal Reserve Board has determined to be closely related to




12
  Any one of the following circumstances will trigger coverage under the BHC Act: (1)
stock ownership—the company owns, controls, or has the power to vote 25 percent or
more of any class of the voting securities of a bank or bank holding company (either
directly or indirectly or acting through one or more other persons); (2) ability to elect a
board majority—the company controls the election of a majority of the directors or trustees
of a bank or bank holding company; or (3) effective control of management—the Board
determines, after notice and opportunity for hearing, that the company directly or indirectly
exercises a controlling influence over the management or policies of a bank or bank
holding company. For purposes of any such proceeding, it is presumed that any company
that directly or indirectly owns, controls, or has power to vote fewer than 5 percent of any
class of voting securities of a specific bank or bank holding company does not have the
requisite control. See 12 U.S.C. § 1841(a)(1),(2).
13
  12 U.S.C. § 1843(k)(1). The financial holding company can engage in activities that the
Board determines (1) to be financial in nature or incidental to such financial activity, or (2)
are complementary to a financial activity and does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally. The bank
holding company and its depository institution subsidiaries must be well-capitalized and
well-managed. 12 U.S.C. § 1843(l)(1).
14
  Pub. L. No. 73-43, 48 Stat. 128 (1933), 12 U.S.C. § 1461 et. seq




Page 8                                                GAO-12-160 Bank Holding Company Act
banking and activities permissible for financial holding companies. 15 With
the abolishment of OTS, the Federal Reserve is now the regulator for
these holding companies. 16 The Dodd-Frank Act made significant
changes to the regulatory framework for S&L holding companies. The
Dodd-Frank Act amends HOLA and the BHC Act to create similar
requirements for both bank holding companies and S&L holding
companies. For example, the Dodd-Frank Act amended both the BHC Act
and HOLA to provide that the Federal Reserve Board has authority to
impose capital requirements on depository institution holding companies
by regulation or order, including bank holding companies and S&L holding
companies.

Before GLBA, commercial companies could own a single S&L without
becoming subject to the activities restrictions that apply to S&L holding
companies, and a number of commercial firms—such as General Electric;
Macy’s, Inc.; and Nordstrom, Inc.—acquired S&Ls. While GLBA
prohibited commercial activities for all S&L holding companies, it
“grandfathered” the companies that already owned an S&L subsidiary—
that is, it allowed these companies to keep the existing S&L and engage




15
  HOLA permits an S&L holding company to engage in activities closely related to
banking, activities permitted for financial holding companies, and certain other activities.
The Dodd-Frank Act also requires S&L holding companies (other than grandfathered
unitary S&L holding companies) to comply with certain requirements before they may
engage in activities permissible for financial holding companies that previously applied
only to bank holding companies. In order to conduct activities permissible for financial
holding companies, S&L holding companies and their depository institution subsidiaries
must be well-capitalized and well-managed. 12 U.S.C. § 1467a(c)(2)(H). These
restrictions on activities do not apply to grandfathered unitary thrift holding companies as
explained in the following paragraphs.
16
  The Dodd-Frank Act eliminated OTS, which chartered and supervised federally
chartered S&Ls and S&L holding companies. 12 U.S.C § 5413. Rulemaking authority
previously vested in OTS was transferred to OCC for S&Ls and to the Federal Reserve for
S&L holding companies and their subsidiaries, other than depository institutions. 12
U.S.C. § 5412. Supervision of state chartered S&Ls was transferred to FDIC. 12 U.S.C. §
5412(b)(2)(C). The transfer of these powers was completed on July 21, 2011, and OTS
was officially dissolved 90 days later (Oct. 19, 2011). In September 2011, the Federal
Reserve issued Regulation LL, an interim final rule, to govern S&L holding companies.
See 76 Fed. Reg. 56,508. S&L holding companies must obtain prior approval from the
Federal Reserve for the formation of holding companies, the acquisition of control of
depository institutions, and the merger of holding companies.




Page 9                                               GAO-12-160 Bank Holding Company Act
in commercial activities. 17 The Dodd-Frank Act generally does not restrict
the activities of grandfathered unitary S&L holding companies, but it
amends HOLA to authorize the Federal Reserve to determine whether to
require grandfathered unitary S&L holding companies engaged in
nonfinancial activities to form intermediate holding companies. A
grandfathered unitary S&L holding company will be required to establish
an intermediate holding company if the Federal Reserve determines that
the establishment of the intermediate holding company is necessary to
appropriately supervise activities determined to be financial activities or to
ensure that supervision by the Federal Reserve does not extend to the
grandfathered unitary S&L holding company’s nonfinancial activities. The
intermediate holding company would be subject to regulation as an S&L
holding company and would be required to conduct all or a portion of the
firm’s financial activities. The grandfathered unitary S&L holding company
would be required to serve as a source of strength—that is, to provide
financial assistance in the event of financial distress—to its subsidiary
intermediate holding company. The Federal Reserve can also require
certain reports from and undertake limited examinations of grandfathered
unitary S&L holding companies.

In addition, the Dodd-Frank Act requires the Federal Reserve to require
all bank holding companies and S&L holding companies to serve as a
source of strength to their subsidiary depository institutions. The Federal
Reserve regulations governing S&L holding companies state that an S&L
holding company “shall serve as a source of financial and managerial
strength to its subsidiary savings associations.” The Dodd-Frank Act
defines the term “source of strength” as the ability of a company that
directly or indirectly owns or controls an insured depository institution to
provide financial assistance in the event of financial distress of the
insured institution. If an insured depository institution is not the subsidiary
of a bank holding company or an S&L holding company, the appropriate
federal regulator for the insured depository institution will require any
company that directly or indirectly controls the insured depository
institution to serve as a source of financial strength to the insured
depository institution.



17
  12 U.S.C. § 1467a(c)(3); 12 U.S.C. § 1467a(c)(9). The subsidiary must meet the
“qualified thrift lender” test and maintain a minimum percentage of its assets in qualified
thrift investments. If the subsidiary fails the test, the holding company will become a bank
holding company. 12 U.S.C. § 1467a(m)(3)(C).




Page 10                                              GAO-12-160 Bank Holding Company Act
                           The Dodd-Frank Act also made significant changes in the capital
                           requirements applicable to certain bank holding companies and S&L holding
                           companies. Depository institution holding companies will be subject to
                           minimum leverage and risk-based capital requirements on a consolidated
                           basis. These capital requirements must not be lower than the leverage and
                           risk-based capital requirements applicable to insured depository institutions
                           as in effect on July 21, 2010. In general, the new capital requirements will
                           apply to S&L holding companies beginning July 21, 2015.


Consolidated Supervision   The Federal Reserve’s bank holding company supervision manual
                           explains that the holding company structure can adversely affect the
                           financial condition of a bank subsidiary by exposing the bank to various
                           types of risk, including market, operational, and reputational risks. For
                           example, a holding company or an affiliate with poor risk management
                           procedures may take excessive investment risks and fail. The failure of a
                           holding company or affiliate can impair an insured institution’s access to
                           financial markets. Moreover, a poorly managed bank holding company
                           can initiate adverse intercompany transactions with the insured
                           depository institution or impose excessive dividends on it. 18 Adverse
                           intercompany transactions may include charging the insured depository
                           institution above-market prices for products or services, such as
                           information technology services, provided by an affiliate or requiring the
                           insured institution to purchase poor quality loans at inflated prices from an
                           affiliate, thus placing the insured institution at greater risk of loss. Market
                           risk is the risk to a banking organization’s financial condition resulting
                           from adverse movements in market prices due to such factors as
                           changing interest rates. Operational risk is the potential that inadequate
                           information systems, operations problems, breaches in internal controls,
                           or fraud will result in unexpected losses. From a practical standpoint,
                           insured depository institutions may be susceptible to operational risk
                           when they are dependent on or share in the products or services of a
                           holding company or its subsidiaries, such as information technology
                           services or credit card account servicing. If these entities ceased their
                           operations, the insured institution could be adversely impacted.
                           Reputational risk is the potential that negative publicity regarding an
                           institution’s or affiliate’s business practices, whether true or not, could



                           18
                             As discussed more fully later in this report, federal law restricts transactions between an
                           insured depository institution and its bank holding company affiliates.




                           Page 11                                              GAO-12-160 Bank Holding Company Act
cause a decline in the customer base, costly litigation, or revenue
reductions. Operational or reputational risk that impacts the holding
company can also affect affiliates throughout the corporate structure.

The BHC Act has established a consolidated supervisory framework for
assessing the risks to a depository institution that could arise because of
its affiliation with other entities in a holding company structure.
Consolidated supervision of a bank holding company includes the parent
company and its subsidiaries and allows the regulator to understand the
organization’s structure, activities, resources, and risks and to address
financial, managerial, operational, or other deficiencies before they pose
a danger to the bank holding company’s subsidiary depository institutions.
According to Federal Reserve Board Supervisory Letter SR 08-9, the
agency has established capital standards for bank holding companies,
helping to ensure that they maintain adequate capital to support
groupwide activities, do not become excessively leveraged, and are able
to serve as a source of strength to their depository institution subsidiaries.
The Federal Reserve may generally examine holding companies and
their nonbank subsidiaries, subject to some limitations, to assess the
nature of the operations and financial condition of the holding company
and its subsidiaries, the financial and operational risks within the holding
company that may pose a threat to the safety and soundness of any
depository institution subsidiary, and the systems for monitoring and
controlling such risks, among other things.

As the new regulator for S&L holding companies, the Federal Reserve
has indicated that it intends, to the greatest extent possible taking into
account any unique characteristics of S&L holding companies and the
requirements of HOLA, to assess the condition, performance, and
activities of S&L holding companies on a consolidated basis in a manner
that is consistent with the Board’s established risk-based approach
regarding bank holding company supervision.

In contrast, FDIC and OCC do not have consolidated supervisory
authority over the holding companies for the exempt banking institutions
but do have full authority to apply to them the same federal regulatory
safeguards that apply to all insured banks and S&Ls. For example, FDIC
and OCC can impose conditions and examine agreements,
dependencies, and transactions between exempted depository
institutions and their holding companies (including affiliated entities) in
order to better ensure the safety and soundness of those institutions.
Furthermore, FDIC can terminate an exempted entity’s deposit insurance,
enter into agreements during the acquisition of an insured entity, and take



Page 12                                     GAO-12-160 Bank Holding Company Act
                     enforcement measures. In addition, FDIC possesses authority under
                     Section 10 of the FDI Act to examine the affairs of any affiliate of any
                     depository institution as may be necessary to disclose fully (1) the
                     relationship between such depository institution and any such affiliate and
                     (2) the effect of such relationship on the depository institution.


BHC Act Exemptions   Section 2 of the BHC Act exempts companies owning certain types of
                     financial institutions from regulation under the BHC Act because the
                     institutions they own are not defined as “banks” in the BHC Act.
                     Companies owning these institutions are not considered bank holding
                     companies; are not required to comply with the BHC Act’s restrictions on
                     activities; and with one exception, they are not subject to the Federal
                     Reserve’s oversight. The statutory exemptions from the definition of
                     “bank” were established by the Competitive Equality Banking Act of 1987
                     (CEBA), which also expanded the definition of “bank“ in the BHC Act to
                     include all FDIC-insured institutions. 19 The CEBA exemptions include
                     ILCs, limited purpose credit card banks, trust banks and S&Ls. 20 One
                     type of exempt institution, ILCs, began in the early 1900s as small, state-
                     chartered loan companies that served the borrowing needs of industrial
                     workers who were unable to obtain noncollateralized loans from
                     commercial banks. The ILC industry experienced significant asset growth
                     in the 2000s, and ILCs evolved from small, limited-purpose institutions to
                     a diverse group of insured financial institutions with a variety of business
                     models. S&Ls are exempt institutions but S&L holding companies were
                     subject to holding company supervision by OTS and now the Federal
                     Reserve. In addition, S&L holding companies are subject to restrictions
                     on activities set out in HOLA. We also considered one type of institution




                     19
                      Pub. L. No. 100-86, § 101, 101 Stat. 552, 554 (1987).
                     20
                       The exempt institutions that the Dodd-Frank Act required us to address are described at
                     12 U.S.C. §1841(c)(2)(F) for credit card banks; 12 U.S.C.§1841(c)(2)(H) for ILCs; 12
                     U.S.C. §1841(a)(5)(E) for municipal deposit banks; 12 U.S.C. §1841(c)(2)(B) for S&Ls;
                     and 12 U.S.C. §1841(c)(2)(D) for trust banks.




                     Page 13                                           GAO-12-160 Bank Holding Company Act
                        that was exempted by the Bank Holding Company Act Amendments of
                        1970, municipal deposit banks. 21

                        Table 2 identifies the federal regulators for the certain types of exempt
                        institutions.

                        Table 2: Certain BHC Act Exempt Institutions and Their Federal Regulators

                         Exempt Institution                                   Federal regulator
                         ILC                                                  •      FDIC
                         Limited-purpose credit card bank                     •      Federally chartered: OCC
                                                                              •      State chartered: FDIC
                         Municipal deposit bank                               •      FDIC
                         Trust bank                                           •      Federally chartered: OCC
                                                                              •      State chartered: FDIC
                         S&L                                                  •      S&L holding companies: Federal Reserve
                                                                              •      Federally chartered S&Ls: OCC
                                                                              •      State chartered S&Ls: FDIC
                        Sources: GAO summary of information from FDIC, the Federal Reserve, and OCC.




                        Financial institutions that are exempt from the BHC Act definition of bank
Exempt Financial        make up a small percentage of the overall banking system—1,002
Institutions Vary by    institutions (about 7 percent)—and include ILCs, limited-purpose credit card
                        banks, municipal deposit banks, trust banks with insured deposits, and
Size, Ownership,        S&Ls. If S&Ls, which are different from the other types of exempt
Activities, and Risks   institutions in that they are regulated by the Federal Reserve at the holding
                        company level, are excluded, the percentage drops to less than 1 percent,


                        21
                          12 U.S.C. § 1841(a)(5)(E) exempts companies owning any state-chartered bank or trust
                        company that is wholly owned by thrift institutions or savings banks and is restricted to
                        accepting deposits from thrifts or savings banks; deposits from the business of the thrift or
                        savings bank’s business; and deposits of public monies. 12 U.S.C. § 1841(a)(5)(F)
                        exempts from bank holding company regulation trust companies and mutual savings
                        banks that control one bank located in the same state that meets certain criteria. Both of
                        these exemptions were enacted in the Bank Holding Company Act Amendments of 1970,
                        Pub. L. No. 91-607, § 101(a), 84 Stat. 1760 (1970). According to the Federal Reserve,
                        the legislative history of this act indicates that the exemption in 12 U.S.C. § 1841(a)(5)(F)
                        was intended to apply to Missouri trust companies and Rhode Island mutual savings
                        banks that owned or controlled a bank, as authorized by state law, before 1971. According
                        to Federal Reserve officials, supervisors in Rhode Island and Missouri have informed
                        them that, as of December 2010, there were no trust companies or mutual savings banks
                        operating under the exemption. See H.R. Rept. No. 91-1084, at 11 (1970).




                        Page 14                                                               GAO-12-160 Bank Holding Company Act
                            or 57 institutions. Determining whether the holding companies that own
                            exempt institutions are commercial is difficult, given the lack of a standard
                            definition and limited publicly available data on exempt institutions. The risk
                            profiles for exempt institutions vary, reflecting differences in the institutions’
                            size, complexity, and level of banking and nonbanking activities.


Exempt Institutions Make    The assets of institutions exempt from the definition of bank in the BHC Act
Up about 7 Percent of the   that we reviewed account for about 7 percent of the total assets in the U.S.
U.S. Banking System         banking system. 22 S&Ls account for almost 7 percent of all FDIC-insured
                            institutions, as of June 30, 2011. The 57 institutions among the other types
                            of exempt institutions as of 2011 held less than 1 percent in the assets of
                            FDIC-insured banks.23 The 57 non-S&L exempt institutions were ILCs (34),
                            limited-purpose credit card banks (10), trust banks (3), and municipal deposit
                            banks (10). These exempt institutions were generally small in terms of
                            assets. For example, only 8 of the 57 exempt institutions had assets of more
                            than $5 billion, and more than half of them had assets of less than $500
                            million. Appendix II contains additional information on these 57 exempt
                            institutions, including their federal regulators and asset sizes.

                            Aside from S&Ls, the largest category of exempt institutions is ILCs, which
                            have been declining in number and size in recent years. Since 2006, the
                            number of ILCs has declined from 58 to 34, and the assets of these
                            institutions have dropped from $212.7 billion to $102.4 billion. Federal
                            regulators and industry representatives attributed these declines to several
                            factors, but most frequently to the federal moratoriums on deposit insurance
                            for new ILCs. In particular, FDIC imposed a moratorium on deposit insurance




                            22
                              For the purposes of this report, we define the U.S. banking system to be the collection of
                            all FDIC-insured institutions.
                            23
                              The number and size (as measured by assets) of S&Ls have declined in recent years. In
                            2006, there were about 1,103 S&Ls with combined assets of $1.6 trillion. As of June 30,
                            2011, there were about 945 S&Ls with combined assets of $0.9 trillion. S&Ls owned by
                            bank holding companies were not included in the number of S&Ls we identified in 2006 or
                            2011. An OCC official attributed this decline to statutory changes that removed the
                            primary advantages of holding an S&L charter over commercial banks. Specifically,
                            commercial banks can now branch across state lines, and S&Ls are now subject to the
                            same preemption standards as national banks. Counts of ILCs, limited-purpose credit card
                            banks, municipal deposit banks, and trust banks only include those that are not
                            subsidiaries of bank holding companies.




                            Page 15                                             GAO-12-160 Bank Holding Company Act
for new ILCs in 2006, and no ILCs have been approved since then.24 Also,
during the 2007-2009 financial crisis, a number of the larger ILC holding
companies applied and were approved to become bank holding companies,
including American Express Company; Goldman Sachs Group, Inc.; Morgan
Stanley; and GMAC Financial Services. Merrill Lynch & Co. also owned an
ILC that became part of the Bank of America Corporation, a bank holding
company, when it acquired Merrill Lynch in 2008. Subsequent to the FDIC
moratoriums, the Dodd-Frank Act placed a 3-year moratorium on FDIC
approval of deposit insurance applications received after November 23,
2009, for ILCs, credit card banks, and trust banks that were directly or
indirectly owned or controlled by a commercial firm. In addition, the Dodd-
Frank Act provides that until July 21, 2013, FDIC may not approve any
change in control of an ILC, trust bank, or credit card bank that would place
the institution under the control of a commercial firm.

The combined assets of limited-purpose credit card banks, trust banks, and
municipal deposit banks totaled $10.3 billion as of June 30, 2011. The
assets of the 10 limited-purpose credit card banks, which issue only credit
cards, totaled $8.5 billion, and the assets of these limited-purpose credit
card banks ranged from $3 million to $4.7 billion. 25 Many limited-purpose
credit card banks sell their credit receivables to the parent company, so
their assets are typically small. Four limited-purpose credit card banks
issue what are called private-label cards, while three issue general-purpose
credit cards and two offer both types. 26 The 10 municipal deposit banks’
assets totaled $1.5 billion, and the three trust banks’ assets totaled about
$318 million, as of June 2011.




24
  In July 2006, FDIC imposed a 6-month moratorium on approving any deposit insurance
applications and change in control notices for ILCs. In January 2007, this moratorium was
extended for a year with respect to those deposit insurance applications and change in
control notices filed by nonfinancial companies. The moratorium expired in January 2008.
Several large corporations had submitted applications to FDIC for deposit insurance prior
to the— moratorium— such as Ford Motor Company; Wal-Mart Stores, Inc.; and the
Home Depot, but they withdrew their applications before FDIC ruled on them.
25
  Credit card issuers are any person who issues a credit card or the agent of such person
with respect to such card.
26
  General-purpose or universal credit cards can be used at a variety stores and
businesses. Private-label credit cards are issued under an open-ended agreement and
can be used to make purchases only at a single merchant or an affiliated group of
merchants.




Page 16                                            GAO-12-160 Bank Holding Company Act
As shown in figure 1, ILCs, limited-purpose credit card banks, municipal
deposit banks, and trust banks are geographically concentrated. For
example, limited-purpose credit card banks are located in 10 states. ILCs
are located in five states—California, Hawaii, Nevada, Minnesota, and
Utah. All 10 municipal deposit banks are located in New York, and the 3
trust banks are located in Georgia, Maryland, and Massachusetts. 27 In
contrast, as of June 30, 2011, 945 S&Ls (including both federally and
state-chartered S&Ls) were in operation and of these approximately 426
are owned by S&L holding companies, concentrated primarily in New
England, the Northeast, and the Midwest as of June 30, 2011.




27
  According to the Federal Reserve, municipal deposits banks are all located in the state
of New York because under New York state law, savings banks cannot accept deposit
from municipalities. The creation of a municipal deposit subsidiary bank allows the savings
banks to accept these deposits. Although the municipal deposit banks have commercial
bank charters, a company that owns or controls a municipal deposit bank is not a BHC.




Page 17                                            GAO-12-160 Bank Holding Company Act
Figure 1: Geographic Distribution of ILCs, Limited-Purpose Credit Card Banks, Trust Banks, and Municipal Deposit Banks, as
of September 30, 2011




                                        Page 18                                        GAO-12-160 Bank Holding Company Act
Ownership Type of the       Determining whether holding companies that own ILCs, limited-purpose
Holding Companies That      credit card banks, municipal deposit banks, and trust banks are
Own Exempt Financial        commercial or noncommercial is challenging, for several reasons. For
                            example, the lack of publicly available data on the holding companies’
Institutions Is Often Not   revenue sources complicates efforts to determine the ownership type.
Clear                       Some holding companies that own exempt institutions are not public
                            companies and thus are not required to submit filings that contain such
                            information that would be publicly available. In addition, regulators do not
                            make the distinction between commercial and noncommercial ownership.
                            FDIC officials told us that they focused on the activities and risks of the
                            exempt institutions and their holding companies regardless of type. The
                            Dodd-Frank Act sets forth a definition of “commercial”: companies are
                            considered commercial if revenue from financial activities (as defined
                            under Section 4(k) of the BHC Act) generates less than 15 percent of
                            their annual gross revenue. 28 Using this definition, a number of
                            companies that are generally considered commercial would be
                            considered noncommercial because their revenue from financial activities
                            is 15 percent or more. For example, using this definition, the General
                            Electric Company is classified as noncommercial because its financial
                            services business segment accounted for more than 31 percent of its
                            2010 annual gross revenue.

                            Working within these challenges and limitations, we were able to
                            determine the status of the holding companies for 43 of the 57 ILCs,
                            limited-purpose credit card banks, municipal deposit banks, and trust
                            banks. Using the definition of commercial from the Dodd-Frank Act and
                            publicly available financial data, we determined that 11 exempt
                            institutions were owned by commercial companies and 32 by
                            noncommercial companies (see table 3). The status of the holding
                            companies of the remaining 14 institutions could not be determined
                            because of the lack of sufficiently detailed, publicly available financial
                            data about the companies or information from OCC or FDIC. 29




                            28
                             Annual gross revenue is the total income of a business for 1 year.
                            29
                              For this report, we are using the term “noncommercial” rather than “financial holding
                            company” to avoid confusing these holding companies with financial holding companies
                            that are bank holding companies that make an election to be treated as financial holding
                            companies.




                            Page 19                                            GAO-12-160 Bank Holding Company Act
                            Table 3: Commercial Status of Holding Companies Owning ILCs, Limited-Purpose
                            Credit Card Banks, Municipal Deposit Banks, and Trust Banks, as of December 31,
                            2010

                                                                         Owned by                         Owned by
                                Type of exempt                       noncommercial                      commercial              Ownership
                                institutions                            companiesa                       companies            undetermined
                                ILCs                                                     19                               5            10
                                Limited-purpose                                           1                               6             3
                                credit card banks
                                Municipal deposit                                        10                               0              0
                                banks
                                Trust banks                                               2                               0              1
                                Total                                                    32                           11               14
                            Sources: GAO analysis based on 2010 SEC filings, company 2010 annual reports, and OTS data.
                            a
                            Noncommercial holding companies are generally financial in nature.


                            According to information from OCC, one trust bank owned an affiliate as
                            of May 7, 2011. However, under the Dodd-Frank Act definition of
                            commercial, the affiliate is non-commercial.


Exempt Institutions’ Risk   The risk profiles for exempt institutions vary, reflecting differences in the
Profiles Vary               institutions’ size, complexity, and level of banking and nonbanking
                            activities. While few of the exempt institutions are large depository
                            institutions that pose significant systemic risk to the financial system,
                            many engage in several types of banking and nonbanking activities that
                            carry a variety of risks. These risks exist at the depository institution and
                            holding company levels.

                            •      ILCs. The Federal Reserve and Treasury view these institutions as
                                   full-service commercial banks and therefore view the risks they pose
                                   as similar to those of commercial banks, including credit risk. The
                                   FDIC concurs in this view and noted that many exempt institutions
                                   primarily accept brokered deposits, considered to be riskier than




                            Page 20                                                                GAO-12-160 Bank Holding Company Act
    demand deposits because of concerns about liquidity risks. 30 ILCs
    can provide a wide range of banking services and are able to make
    loans (including credit card loans) and investments, like commercial
    banks.

•   Limited-purpose credit card banks. These exempt institutions are
    generally restricted to credit card lending activities and are not
    permitted to conduct many banking activities, such as mortgage or
    commercial lending. 31 They are not permitted to accept demand
    deposits. The most dominant risks for these banks are compliance,
    liquidity, reputational, and to some extent credit risk.

•   Municipal deposit banks and trust banks. These exempt institutions’
    banking activities are limited. The sole purpose of municipal deposit
    banks is to accept municipal deposits, and these banks do not make
    commercial or consumer loans. Similarly, the three trust banks that
    are exempt from the BHC Act function only in a fiduciary capacity and
    do not pose the same types of financial risks as commercial banks.
    Their risk profile is based on fiduciary responsibility and litigation risk.

•   S&Ls. These exempt institutions offer a range of banking services that
    are similar to those provided by commercial banks, including offering
    a variety of banking products, accepting demand deposits and making
    commercial, real estate, and residential mortgage loans. Because
    S&Ls are similar to commercial banks, they are exposed to credit,



30
  Brokered deposits are deposits acquired through a deposit broker. “Deposit broker”
means (1) any person engaged in the business of placing deposits, or facilitating the
placement of deposits, of third parties with insured depository institutions, or any person in
the business of placing deposits with insured depository institutions for the purpose of
selling interests in those deposits to third parties, and (2) an agent or trustee who
establishes a deposit account to facilitate a business arrangement with an insured
depository institution to use the proceeds of the account to fund a prearranged loan. A
demand deposit means that the depositor has a right to withdraw at any time without prior
notice to the depository institution. Demand deposits are commonly offered in the
form of checking accounts.
31
  A bank holding company may own an insured bank that engages exclusively or
predominantly in credit card activities. Credit card banks owned by bank holding
companies may legally offer additional commercial banking services unless prohibited by
the articles of association. These banks are “banks” under the BHC Act, and a company
that owns one is subject to the BHC Act. The Dodd-Frank Act permits exempt credit card
banks to provide small business loans.




Page 21                                              GAO-12-160 Bank Holding Company Act
     liquidity, operational, reputational, and compliance risks. However, as
     discussed, unlike the owners of other exempt institutions, S&L holding
     companies are subject to supervision and regulation at the holding
     company level, by the Federal Reserve.

In addition to their banking activities, commercial ownership of exempt
institutions could pose additional risks. Federal Reserve, FDIC and Treasury
officials each acknowledged the risk that a commercial holding company
may seek to operate an exempt financial institution for the holding
company’s own benefit. For example, ILCs and limited-purpose credit card
banks could be directed to engage in transactions that benefited the holding
company’s affiliates but were detrimental to the financial institutions’ safety
and soundness. To address adverse transactions between an insured
institution and its affiliates, Congress restricted the ability of insured
depository institutions, including exempt institutions, to enter into transactions
with affiliates.32 Insured institutions are subject to both qualitative and
quantitative limits on transactions with affiliates. For example, a bank may
not engage in a transaction with an affiliate if the aggregate amount of the
bank’s covered transactions with all affiliates would exceed 20 percent of the
bank’s capital stock and surplus. 33 In addition, an institution generally cannot
purchase low-quality assets from an affiliate. Congress established collateral
requirements for credit transactions provided to an affiliate, generally
requiring that a credit transaction be secured by collateral having market
value of at least 100 percent of the transaction. All covered transactions
between depository institutions and their affiliates must be on terms and
conditions that are consistent with safe and sound banking practices. 34
Additionally, covered transactions between institutions and their affiliates
must occur on market terms, which must be at least as favorable to the
institution as those prevailing at the time for comparable transactions with
unaffiliated companies.35



32
  A covered transaction includes a loan or extension of credit to an affiliate; a purchase of,
or an investment in the securities issued by the affiliate, guarantees on behalf of an
affiliate, and certain other transactions that expose the insured institution to the affiliate’s
credit or investment risk. An institution’s affiliates include any company that controls or is
controlled by the institution, and any company under common control with the institution.
12 U.S.C. § 371c(b)(1).
33
  12 U.S.C. § 371c(a)(1).
34
  12 U.S.C. § 371c(a)(4).
35
  12 U.S.C. § 371c-1(a)(1).




Page 22                                               GAO-12-160 Bank Holding Company Act
While the regulators view the commercial ownership of exempt
institutions as posing potential risks to the financial institution,
representatives from exempt institutions countered that such ownership
could be a source of strength. In particular, representatives of the 14 ILCs
and 3 limited-purpose credit card banks we interviewed said that their
holding companies currently could serve as a source of strength to their
depository institutions. To assess whether these holding companies could
be a source of strength to the financial institution, we analyzed the
capitalization of holding companies for ILCs and credit card banks. 36 On
average, the holding companies of ILCs and credit card banks we
analyzed had higher ratios of equity-to-total assets over the 5-year period
than bank holding companies (see fig. 2). The higher ratio shows that
these holding companies had a higher, stronger cushion against losses
that might occur. The average equity-to-total assets ratios for limited-
purpose credit card banks remained above 20 percent over the period. In
comparison, the average equity-to-total assets ratio of bank holding
companies with total assets of more than $500 million that were required
to file financial data with the Federal Reserve remained below 10 percent
during the same period.




36
    For bank holding companies, we calculated the average of the ratio of equity capital to
total assets for 2006-2010 using the data from bank holding companies’ Form FR Y-9C
filings. For parent holding companies of industrial loan corporations and limited purpose
credit card banks that are not bank holding companies, we calculated the average of the
ratio of equity to assets for 2006-2010 using balance sheet data from SNL Financial or
from companies’ annual report or 10-K filings.




Page 23                                              GAO-12-160 Bank Holding Company Act
Figure 2: Average Equity-To-Total Assets Ratios for Holding Companies of ILCs
and Limited-Purpose Credit Card Banks Compared with Those of Bank Holding
Companies, 2006-2010




Note: We examined the equity positions of the ILCs and the limited-purpose credit card banks
because they were more likely to be owned by commercial firms compared to the other exempt
institutions. We analyzed the equity-to-total ratios assets for 44 institutions.


Federal Reserve acknowledged that commercial holding companies may
be able to act as a source of strength for exempt institutions. However,
they expressed three concerns. First, Federal Reserve officials noted that
no federal regulator was assigned to look at the health of the entire
holding company for an exempt institution, other than for S&Ls, creating a
potential regulatory “blind spot.” The officials explained that a regulator
should have the authority to look at the entire organization and not at
what affects only the depository institutions. Second, holding companies
of ILCs are not held to the same risk management and capital standards
as bank holding companies, according to the officials. For example,
through consolidated supervision, the Federal Reserve assesses a bank
holding company’s risk management functions and its impact on the
depository institution. Third, regulators cannot take enforcement actions
to compel nonbank holding companies to serve as a source of strength




Page 24                                                 GAO-12-160 Bank Holding Company Act
                        for the exempt institution. 37 Prior to the Dodd-Frank Act, FDIC and OCC
                        could ask holding companies to inject capital into exempt depository
                        institutions and to enter into agreements with them requiring such capital
                        injections when necessary. Under the Dodd-Frank Act, as described
                        earlier, if an insured depository institution is not the subsidiary of a bank
                        holding company or an S&L holding company, the appropriate federal
                        regulator for the insured depository institution will require any company
                        that directly or indirectly controls the insured depository institution to
                        serve as a source of financial strength for the insured depository
                        institution. Although FDIC and OCC can take enforcement action against
                        holding companies that engaged in unsafe and unsound practices
                        affecting the exempt institution, they do not have the same authority as
                        the Federal Reserve to set and enforce minimum capital levels on holding
                        companies.


                        Federal regulation of exempt institutions differs across the banking
Federal Regulation of   regulators and is evolving. However, views on the adequacy of the
Exempt Institutions     regulation varied with FDIC and OCC and regulated institutions viewing it
                        as adequate and the Federal Reserve and Treasury viewing it as lacking.
Differs across
Regulators, and Views
on Regulatory
Adequacy Are Mixed




                        37
                           Prior to the Dodd-Frank Act, the Federal Reserve required bank holding companies to
                        serve as a source of strength as a matter of policy. Section 616(d) of the Dodd-Frank Act
                        codified and enhanced that source of strength principle and applies it to S&L holding
                        companies and to insured depository institutions that are not subsidiaries of bank holding
                        companies or S&L holding companies. The Dodd-Frank Act defines source of strength as
                        the ability of a company that directly or indirectly controls an insured depository institution
                        to provide financial assistance to such insured depository institution in the event of
                        financial distress. In addition to expanding the scope of the coverage to include any
                        company that controls an insured institution, the Dodd-Frank Act requires the banking
                        regulators to issue joint rules to implement the statute by July 21, 2012.




                        Page 25                                               GAO-12-160 Bank Holding Company Act
Supervision of ILCs and       FDIC and OCC, which oversee ILCs, limited-purpose credit card banks,
Limited-Purpose Credit        and trust banks, are focused primarily on the safety and soundness of the
Card Banks Focuses on         exempt institutions. To carry out its supervisory responsibilities, FDIC
                              generally conducts annual full-scope examinations of ILCs and state-
the Institutions’ Financial   chartered limited-purpose credit card banks jointly with the state
Condition                     regulators and assigns each a CAMELS rating. 38 OCC examines federally
                              chartered limited-purpose credit card banks every 12-18 months.

                              FDIC and OCC focus on the exempt institutions’ financial health and do
                              not have the statutory authority to examine all relationships within the
                              holding company structure that could pose risks to the exempt institution.
                              However, beyond its focus on the insured institutions’ safety and
                              soundness, we found that FDIC examiners look at the exempt institutions’
                              affiliate relationships as part of the examination. In particular, from our
                              selected review of 11 examination reports that FDIC conducted of ILCs in
                              2008 through 2011, we found that FDIC examiners reviewed transactions
                              between the ILCs and their affiliates. 39 For example, most of the
                              examination reports described the various affiliates, including holding
                              company structure and affiliate transactions. According to FDIC’s Risk
                              Management Manual of Examination Policies, examiners should look at
                              the affiliate transactions to determine whether the terms of these
                              transactions are comparable to the terms of similar nonaffiliate
                              transactions. FDIC examination reports included information on affiliate
                              relationships and transactions and oversight of the exempt institution and,
                              for most of the reports we reviewed, FDIC did not raise any issues with
                              affiliate transactions. However, in one case FDIC noted that the exempt
                              institution had used an affiliate for critical activities and in another
                              reported a violation relating to affiliate transactions to an ILC because its
                              parent holding company had used some of the ILC’s assets as collateral.
                              After FDIC had issued a recommendation that the management should


                              38
                                The CAMELS rating system comprises Capital, Asset Quality, Management, Earnings,
                              Liquidity, and Sensitivity to Risk.
                              39
                                 We reviewed a total of 18 examinations of exempt institutions with assets of $1 billion or
                              more that FDIC and OCC conducted in 2010 and 2011. We chose examinations of the
                              largest banks (by asset size) because these institutions represented a greater financial
                              risk. FDIC has statutory authority to examine any affiliate of a state nonmember bank
                              (including an ILC) as necessary to determine the relationship of that affiliate to the bank
                              and the effect of that relationship on the bank. 12 U.S.C. § 1820(b)(4). Only one limited-
                              purpose credit card bank that OCC supervised had assets of $1 billion or more, which was
                              one of our criteria for choosing examinations to review. Therefore, we judgmentally
                              selected six other examinations, selecting the most recent examinations.




                              Page 26                                             GAO-12-160 Bank Holding Company Act
                           ensure that affiliate agreements with third parties do not cause the bank’s
                           assets to be placed at risk, the ILC management sought reimbursement
                           from the affiliate.

                           Although OCC officials told us that affiliate transactions were reviewed for
                           limited-purpose credit card banks and were considered an important part
                           of the onsite examination, our analysis of seven OCC examination reports
                           showed that affiliate transactions were generally not discussed in detail.
                           According to an OCC lead examiner for credit card banks, aspects of
                           affiliate transactions were included as part of their review of audit,
                           earnings, and management for each of the limited-purpose credit card
                           banks. Because many of the limited-purpose credit card banks rely on the
                           holding company to provide funding for the receivables on a daily basis,
                           the examiners review the transactions to ensure that they are in
                           compliance with the law. The OCC examiner told us that if the examiners
                           had not found any problems with affiliate transactions, the transactions
                           would not be discussed in the reports. However, one examination report
                           noted that a limited-purpose credit card bank had poor documentation
                           relating to its affiliate transactions and had paid an above-market rate to
                           the holding company on a bank deposit.


Oversight of S&Ls Is       The oversight of S&Ls and their holding companies is evolving, with the
Evolving and Will Likely   significant changes likely occurring at holding company level. As of July
Differ from Previous       21, 2011, the Federal Reserve assumed responsibility for supervising
                           S&L holding companies in accordance with the Dodd-Frank Act. The
Regulation                 Federal Reserve plans apply certain elements of its consolidated
                           supervisory program for bank holding companies to S&L holding
                           companies. 40 The consolidated supervision program, which applies
                           primarily to large and regional bank holding companies, is aimed at
                           assessing and understanding the bank holding company on a
                           consolidated basis. In April 2011, the Federal Reserve issued a notice of
                           intent to provide information to the S&L holding companies on how it
                           plans to supervise them and to solicit feedback. The notice covered
                           consolidated supervision, the holding company rating system, capital



                           40
                             As the prior regulator of S&L holding companies, OTS had the authority to supervise the
                           entire S&L holding company organizations and was considered a consolidated supervisor
                           of S&L holding companies. OTS also had the authority to take enforcement actions
                           against the holding company.




                           Page 27                                           GAO-12-160 Bank Holding Company Act
adequacy, and small noncomplex holding companies. 41 In particular, the
Federal Reserve stated that it intended to apply the same type of
consolidated supervision to the S&L holding companies that it applied to
bank holding companies and that this supervision could entail more
rigorous reviews of internal control functions and consolidated liquidity
compared to their previous consolidated supervision. The notice stated
that the supervision may also include discovery reviews of specific
activities as the Federal Reserve attempts to expand its understanding of
certain types of activities. 42 Federal Reserve officials said that the agency
would issue a notice for rulemaking and request for comments once a
supervisory rating system had been developed. 43

Federal Reserve officials also told us that the agency had organized S&L
holding companies into groups based on their size and nonbanking
activities for supervision purposes. Large, complex holding companies—
those with $50 billion or more in assets—will be assigned permanent
onsite examination teams that will provide ongoing supervision. S&L
holding companies with assets of between $10 billion and $50 billion will
be assigned off-site examiners for monitoring that may not be continuous.
For S&L holding companies with assets of less than $10 billion, the
Federal Reserve will depend largely on the primary federal regulator—
either OCC or FDIC—for the exempt S&Ls. S&Ls with less than $10
billion in assets generally consist only of the S&L and a holding company
and thus require less supervision at the holding company level, according
to an OCC official. Relying on the work of the primary federal regulator is
similar to the Federal Reserve’s approach to supervising small “shell”



41
  76 Fed. Reg. 22662-22665. In July 2011 the Federal Reserve issued initial guidance
concerning the Board’s supervisory approach to S&L holding companies during the first
supervisory cycle. The Federal Reserve noted that it will take time for supervisory staff to
better understand an S&L holding company’s operations and business model. The
Federal Reserve also noted that S&L holding companies that engage in significant
commercial, insurance, and broker-dealer activities may be included in separate
supervisory portfolios.
42
  A discovery review is an examination or inspection activity designed to improve the
understanding of a particular business activity or control process, for purposes such as
addressing a knowledge gap that was identified during the risk assessment process.
43
   The Federal Reserve has not yet decided what type of supervisory rating system to use
for the S&L holding companies but has decided against the system OTS had used, the
CORE system. OTS’s CORE System was the agency’s rating system for evaluating the
financial condition of the S&L holding companies. CORE means Capital, Organizational
Structure, Risk Management, and Earnings.




Page 28                                              GAO-12-160 Bank Holding Company Act
bank holding companies. The primary federal bank regulator, either FDIC
or OCC, is responsible for examining the bank, and the Federal Reserve
reviews the holding company information, including financial data such as
the capital and liquidity levels and the quality of the risk management at
the holding company level. 44

While the Federal Reserve plans to use its consolidated supervisory
program for S&L holding companies, it still must decide how it plans to
supervise grandfathered unitary S&L holding companies that engage in
commercial activities. Federal Reserve officials acknowledged that the
regulation and the supervision of grandfathered unitary S&L holding
companies that engage in commercial activities presented unique
supervisory challenges. They said they would look at these holding
companies in a broader framework than OTS had used, because that
approach had covered only the impact of the holding company on the
S&L. These officials said the new framework that is being developed
would allow them to supervise the holding company’s financial activities
but not its commercial activities. As noted earlier, the Dodd-Frank Act
gave the Federal Reserve the authority to decide whether the
grandfathered unitary S&L holding companies should establish
intermediate holding companies for their financial activities. 45 According to
Federal Reserve officials, as of September 30, 2011, this decision had
not been made for any of the grandfathered unitary S&L holding
companies. Representatives from three grandfathered unitary S&L
holding companies told us that in theory they supported the establishment
of intermediate holding companies for their financial activities. But they
added that their support would be contingent on the specifics of the
intermediate holding company structure requirement.




44
  A bank holding company might originate as a ‘‘shell’’ corporation organized by investors
interested in purchasing a bank, or by a bank interested in reorganizing into a holding
company structure in order to expand through acquisition of nonbank concerns or other
banks. The management and board of directors of such a holding company are often the
same as that of the bank.
45
  A holding company can be organized in various ways. All holding companies have a
parent company, but the structure of the overall company may consist of a number of
intermediate holding companies, which in turn may hold other subsidiaries within the
company. For example, GE Money Bank is an S&L that is held directly by General Electric
Consumer Finance, Inc., an intermediate holding company, and the parent holding
company is General Electric Company.




Page 29                                            GAO-12-160 Bank Holding Company Act
                           Conversely, the changes to the supervision of exempt S&Ls are likely to
                           be less pronounced. OCC officials told us that they planned to supervise
                           S&Ls in much the same way they supervised national banks and that
                           their supervision would be the same for S&Ls owned by commercial and
                           noncommercial holding companies. OCC will focus on the S&L—not its
                           holding company—and use an approach that is similar to the bank
                           supervision approach used by OCC bank examination staff. OCC has
                           established mixed supervisory teams made up of both national bank and
                           S&L examiners, with the goal of fostering learning and knowledge sharing
                           on S&Ls throughout the organization. 46 In addition, OCC officials told us
                           that they planned to work with the Federal Reserve to coordinate
                           supervision of S&Ls and their respective holding companies. OCC
                           officials told us that, in particular, there would be greater coordination on
                           midsize and large S&Ls, because some overlap may exist in how these
                           institutions are regulated.


Views on the Adequacy of   Representatives from the exempt financial institutions and an academic
Federal Regulation of      told us that the current regulatory framework was sufficiently robust. They
Exempt Institutions Are    noted that federal and state regulators were able to examine a wide
                           variety of issues through their examination process and minimize certain
Mixed                      risks, such as conflicts of interests between holding companies and their
                           exempt institution subsidiaries, through the examination processes.
                           Industry representatives also suggested that the low number of failures of
                           exempt institutions during the last several years spoke to the robust
                           oversight and strength of the holding company structures. According to
                           our analysis of financial data, no limited-purpose credit card banks and
                           two ILCs failed between 2007 and 2010, compared with hundreds of bank
                           failures.

                           OCC officials told us that they had sufficient authority to examine the
                           affiliates of national banks and could adequately examine the activities of
                           the affiliates that may affect the bank. OCC regulatory and supervisory
                           practices are the same regardless of whether the institution is owned by a



                           46
                             The Dodd-Frank Act included provisions governing the transfers of OTS staff to FDIC
                           and OCC. Because all of OTS’s rulemaking authority for both federal and state chartered
                           S&Ls has been transferred to OCC, most of OTS employees were transferred to OCC,
                           although some of OTS employees were transferred to FDIC. The Dodd-Frank Act did not
                           specify any staff transfers to the Federal Reserve. Federal Reserve officials told us that
                           they have hired about 25 former OTS employees to work on holding company supervision.




                           Page 30                                            GAO-12-160 Bank Holding Company Act
bank holding company or not, according to OCC officials. FDIC officials
believe that they can adequately supervise exempt institutions but
acknowledged the safety and soundness benefits of consolidated
supervision. FDIC officials told us that they tried to ensure that institutions
complied with all applicable laws and regulations and had sufficient
capital. If the parent company runs into trouble, FDIC imposes certain
controls through cease-and-desist orders or other enforcement measures
in order to insulate the insured depository institution from the failings of its
parent company. In 2005, we reported that consolidated supervision was
a recognized method of supervising an insured institution, its holding
company, and affiliates. We noted that while FDIC had developed an
alternative approach that it claimed has mitigated losses to the bank
insurance fund, it did not have some of the explicit authorities that other
consolidated supervisors possess, and its oversight over nonbank holding
companies may be disadvantaged by its lack of explicit authority to
supervise these entities, including companies that own large and complex
ILCs. 47 In 2007, FDIC officials noted in testimony that the number, size
and types of commercial applicants had changed significantly causing the
FDIC to carefully examine this new environment. FDIC officials further
stated that these changes in ownership structures raise potential risks
that deserve further study and represent important public policy issues
that are most appropriately addressed by Congress.

Federal Reserve and Treasury officials contend that the exemptions
represent gaps in the current regulatory structure that pose risks to the
financial system. Federal Reserve and Treasury officials said while
exempt institutions have access to federal deposit insurance, most are
not subject to consolidated supervision. As discussed earlier, these
officials believe that the lack of consolidated supervision of institutions
that are federally insured represent a supervisory “blind spot” that should
be removed. In particular, no federal regulator of the exempt institutions,
excluding S&Ls that are part of holding companies, has the authority to
broadly review the holding company and the other nonbank subsidiaries
within the holding company structure. As a result, some of the potential
activities within the holding company that may affect the exempt
institution may be missed.



47
  GAO, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest
Highlight Differences in Regulatory Authority, GAO-05-621 (Washington, D.C.:
Sept. 15, 2005).




Page 31                                         GAO-12-160 Bank Holding Company Act
Treasury’s 2009 regulatory reform proposal attempted to address these
concerns by recommending that the exemptions to the BHC Act be
removed and that companies owning ILCs, credit card banks, and trust
banks become bank holding companies subject to Federal Reserve
consolidated supervision. 48 With its enactment in 2010, the Dodd-Frank
Act included a 3-year moratorium on approving FDIC insurance for ILCs,
credit card banks, and trust banks that are directly or indirectly owned or
controlled by a commercial firm. The Dodd-Frank Act also established the
Financial Stability Oversight Council (FSOC), which is charged with
determining whether institutions are systemically important, among other
responsibilities. 49 If FSOC were to designate an exempt institution or its
holding company as a systemically important nonbank financial firm, it
would be regulated and supervised by the Federal Reserve. A Federal
Reserve official stated that exempt institutions could be identified as
systemically important nonbank financial firms. However, the official
added that this designation would not address the unbalanced
competition of ILCs or the other exempt institutions that would not be
designated as systemically significant. 50 These ILCs holding companies
would still be able to lend and issue credit through their affiliates without
receiving the same supervision and regulation as bank holding
companies do, according to the Federal Reserve official.




48
 U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation:
Rebuilding Financial Supervision and Regulation (June 17, 2009).
49
   Systemically important financial institutions are important large, interconnected nonbank
financial companies and financial market utilities that could pose a threat to U.S. financial
stability.
50
  The Dodd-Frank Act created FSOC and charged it with identifying and mitigating risk to
the stability of the U.S. financial system, among other duties. As part of its
responsibilities, FSOC can identify nonbank financial firms as systemically important.




Page 32                                              GAO-12-160 Bank Holding Company Act
Removing BHC Act
Exemptions Could
Have Varying
Implications

Removing Exemptions        According to representatives from limited-purpose credit card banks and
Would Likely Lead to       ILCs, commercial holding companies would most likely divest themselves
Divestment or Changes in   of their exempt institutions if the BHC Act exemptions were removed. The
                           BHC Act restricts bank holding companies’ involvement in commercial
Business Models for Many   activities, among other things. Almost all representatives from exempt
Holding Companies with     institutions that are owned by commercial holding companies told us that
Exempt Institutions        divestment was the likely outcome. For example, representatives of all
                           five limited-purpose credit card banks and five ILCs owned by commercial
                           holding companies that we spoke with told us that the parent companies
                           would most likely divest, sell, or liquidate themselves of the exempt
                           institutions. Several representatives from exempt institutions owned by
                           noncommercial holding companies that we spoke with also told us that
                           divestment was likely, although they identified other potential outcomes
                           compared to their counterparts with commercial ownership. For example,
                           three representatives from noncommercial ILCs that we interviewed told
                           us that the holding company could be converted to a bank holding
                           company, the ILC charter could be restructured, or the current business
                           model could be altered to comply with BHC Act requirements.
                           Representatives from one of the noncommercial companies we spoke
                           with stated that the holding company’s ability to compete against larger,
                           more diversified commercial banks would be reduced. Representatives
                           from grandfathered S&Ls owned by commercial companies similarly told
                           us their companies would likely divest themselves of the S&L if the
                           exemptions were removed.

                           Although the Federal Reserve now has the authority to require the
                           grandfathered unitary S&L holding companies to establish intermediate
                           holding companies, current law does not address this issue for the other
                           institutions that are exempt from the BHC Act. We asked representatives
                           from ILCs and credit card banks owned by both commercial and
                           noncommercial holding companies about establishing an intermediate
                           holding company as a potential strategy if the exemptions were removed.
                           Approximately half of the representatives from ILCs and limited-purpose
                           credit card banks whom we interviewed stated that they were either
                           uncertain about or opposed to the idea of an intermediate holding


                           Page 33                                  GAO-12-160 Bank Holding Company Act
company. Some of the representatives that held this opinion argued that
an intermediate holding company structure would not improve the current
regulatory environment or foster greater safety and soundness within the
overall holding company. However, representatives from one limited-
purpose credit card bank stated that an intermediate holding company
could potentially be a compromise. But they added that the utility of such
an option would depend on how the policy was implemented and which
financial activities were required to be conducted within the intermediate
holding company.

Representatives of exempt institutions also told us that divesting the
exempt institutions could have additional implications for the holding
companies, their customers, and their employees.

•   Changes in business models. Representatives from several ILCs and
    limited purpose credit card banks we interviewed told us that their
    exempt institution was an integral part of the parent holding
    company’s business model. Specifically, they stated that the exempt
    institutions were used to help extend credit or streamline customer
    finance operations, lower lending or internal costs, or increase
    customer loyalty. Furthermore for some representatives, divesting
    their exempt institution would likely require changes in their business
    models or could reduce revenues for the holding company. For
    example, three ILCs that we spoke with indicated that divestment
    would result in a decrease in the parent holding companies’ sales or
    revenue. Similarly, four of the five limited-purpose credit card banks
    we spoke with said that in order to continue offering credit without the
    BHC Act exemptions, they would likely have to use a third-party credit
    provider, such as one of the large banks that issue credit cards, and
    would lose interest and late fee income.

•   Changes in customer relationships. Representatives from six ILCs
    and two credit card banks indicated that losing the financial institution
    could result in a significant loss of customers, damage customer
    relations for the parent company, or both. Officials from one ILC
    stated that if the holding company could no longer rely on the BHC
    Act exemption and divested itself of its ILC, its current customers
    would lose access to the revolving credit that the company issued
    through the ILC. Furthermore, they said that the ability to offer credit
    cards increased customer loyalty and provided an additional credit
    option for customers. Officials from a limited-purpose credit card bank
    reported to us that owning a financial institution allowed the holding
    company to retain control of the customer experience over the entire



Page 34                                     GAO-12-160 Bank Holding Company Act
    life cycle of the transaction, from marketing to customer service and
    collection.

•   Increased costs of operations. Representatives from five ILCs and
    one credit card bank told us that losing the exemptions could increase
    costs. That is, if the parent companies divested themselves of their
    financial institutions, the parent companies’ operating or internal costs
    could rise because of increased administrative costs—for example,
    from having to use third-party credit providers. Another group of
    representatives told us that the ILC charter allowed the institution to
    market its products nationally from the state of Utah, reducing
    operational costs.

•   Job losses. Representatives from two exempt institutions told us that
    if the BHC Act exemptions were removed and the parent company
    divested itself of the exempt institution, job losses would be likely at
    the both the financial institution and holding company levels.

Additionally, representatives from municipal deposit banks told us that
their holding companies would most likely decide to divest themselves of
their municipal deposit banks if the exemptions to the BHC Act were
removed. Representatives of the one trust bank we interviewed told us
that its parent company would likely divest itself of the insured deposits—
primarily certificates of deposit—if the exemption for trust banks was
removed. According to the officials of the trust bank, the insured deposits
and the depository institution were a small part of their overall business,
and they would be able to carry out their trust functions without the
insured deposits. They said that they primarily maintained the insured
depository institution because it had been a part of the organization for
historical reasons.




Page 35                                     GAO-12-160 Bank Holding Company Act
Removing the Exemptions
Would Likely Have a
Limited Impact on the
Overall Credit Market and
Would Not Increase
Concentration in Most
Credit Markets

Market Shares for Exempt       Removing the exemptions to the BHC Act would likely have a limited
Institutions Limit Potential   impact on the overall credit market given the small portion of the credit
Impact on Overall Credit       market that exempt institutions represent. As shown in table 4, ILCs and
Market of Removing             limited-purpose credit card banks each accounted for less than 1 percent
Exemptions                     of the loans on the balance sheets of FDIC-insured institutions in 2010,
                               while municipal deposit banks and trust banks each accounted for no
                               loans. In addition, S&Ls that were subsidiaries of grandfathered unitary
                               S&L holding companies (grandfathered S&Ls) accounted for about 2.9
                               percent of loans, and other S&Ls accounted for about 4.6 percent of
                               loans. 51 Given the small market share of each type of exempt institution,
                               any actions they might take if the exemptions were removed—including
                               exiting the market altogether in the case of some grandfathered S&Ls,
                               ILCs, and limited-purpose credit card banks—would likely have little
                               impact on the overall credit market, at least at the national level.
                               However, exempt institutions could have larger market shares in some
                               regions and smaller market shares in others. To the extent that the credit
                               market is segmented by region, the effects of removing the exemptions
                               would likely be larger in regions where exempt institutions are a larger
                               share of the market and smaller in regions where exempt institutions are
                               a smaller share of the market.




                               51
                                 Our earlier analysis was based on total assets, this market share analysis is based on
                               total loans, which yields slightly different percentages.




                               Page 36                                            GAO-12-160 Bank Holding Company Act
Table 4: Percentage of Total Loans and Leases on the Balance Sheets of ILCs,
Limited-Purpose Credit Card Banks, Municipal Deposit Banks, and Trust Banks, as
of June 30, 2010

 Exempt institution type                                                                       Percentage
 ILCs                                                                                                0.5%
 Limited-purpose credit card banks                                                                     0.1
 Municipal deposit banks                                                                               0.0
 Trust banks                                                                                           0.0
Source: GAO analysis of data from FDIC, the Federal Reserve, OCC, and SNL Financial.

Note: Figures show the dollar value of total loans and leases, net of unearned income, on the balance
sheets of exempt institutions as a percent of the dollar value of total loans and leases, net of
unearned income, on the balance sheets of all FDIC-insured institutions. This definition of the market
likely overstates exempt institutions’ market shares because it excludes other providers of credit,
including uninsured affiliates of FDIC-insured institutions, finance companies, credit unions, and other
institutions that are not FDIC-insured.


While removing the exemptions would likely have a limited impact on the
overall credit market, doing so could have a larger impact on segments of
the market in which exempt institutions have larger market shares. These
shares remain relatively small, however. For example, in 2010, ILCs
accounted for about 1 percent of multifamily, commercial, and farm real
estate loans and about 2 percent of non-credit-card consumer loans on
the balance sheets of all FDIC-insured institutions, but they accounted for
less than 1 percent of each of the five other types of loans we analyzed
(construction and land development loans; residential mortgage loans;
commercial, industrial, and agricultural production loans; credit card
loans; and leases). Limited-purpose credit card banks, on the other hand,
accounted for about 1 percent of credit card loans, but they accounted for
less than 1 percent of construction and land development loans and
almost none of any other type of loan. Grandfathered S&Ls accounted for
no leases; less than 1 percent of commercial, industrial, and agricultural
production loans; and for 2 to 5 percent of each other type of loan. Other
S&Ls accounted for more than 9 percent of residential mortgages, less
than 1 percent of credit card loans and leases, and for 1 to 5 percent of
each other type of loan. Although the actions exempt institutions might
take if the exemptions were removed may differ by the type of institution,
the magnitude of the effects of these actions on credit markets—overall or
in specific segments—are likely related to each type of exempt
institution’s share of the market.




Page 37                                                                 GAO-12-160 Bank Holding Company Act
Removing Exemptions        The overall credit market would likely remain unconcentrated even if
Would Likely Not Affect    exempt institutions exited the market and transferred their loans to other
Concentration in Overall   institutions. To assess the impact of removing the exemptions on
Credit Markets             concentration among FDIC-insured institutions, we calculated the
                           Herfindahl-Hirschman Index (HHI), a key statistical indicator used to
                           assess market concentration and the potential for firms to exercise
                           market power. 52 As shown in table 5, the HHI for the overall loan market
                           for 2010 is well below 1,500, the threshold for moderate concentration, as
                           are the HHIs for six of the seven specific loan markets we analyzed
                           (credit card loans were the exception). 53 As a result, firms in the overall
                           loan market and in most market segments likely have little ability to
                           exercise market power by raising prices, reducing the quantity of credit
                           available, reducing innovation, or otherwise harming customers.
                           However, the HHI for the market for credit card loans is close to the
                           threshold for moderate concentration, suggesting that one or more firms
                           making credit card loans may have a moderate amount of market power.
                           Furthermore, our HHIs are for the United States as a whole, and HHIs for
                           markets in specific states or metropolitan areas within the U.S. are likely
                           to be different.



                           52
                              The HHI reflects the number of firms in the market and each firm’s market share, and it
                           is calculated by summing the squares of the market shares of each firm in the market. For
                           example, a market consisting of four firms with market shares of 30 percent, 30 percent,
                           20 percent, and 20 percent has an HHI of 2,600 (900 + 900 + 400 + 400 = 2,600). The
                           HHI ranges from 10,000 (if there is a single firm in the market) to a number approaching
                           zero (in the case of a perfectly competitive market). That is, higher values of the HHI
                           indicate a more concentrated market. Department of Justice (DOJ) and Federal Trade
                           Commission (FTC) guidelines as of August 19, 2010, suggest that an HHI between 0 and
                           1,500 indicates that a market is not concentrated, an HHI between 1,500 and 2,500 is
                           moderately concentrated, and an HHI greater than 2,500 is highly concentrated, although
                           other factors also play a role in determining market concentration. The HHI is one of the
                           market concentration measures that government agencies, including DOJ and the FTC,
                           use when assessing concentration to enforce U.S. antitrust laws. DOJ and FTC often
                           calculate the HHI as the first step in providing insight into potentially anticompetitive
                           conditions in an industry. However, the HHI is a function of firms’ market shares, and
                           market shares may not fully reflect the competitive significance of firms in the market.
                           Thus, DOJ and FTC use the HHI in conjunction with other evidence of competitive effects
                           when evaluating market concentration.
                           53
                              To calculate the HHI, we defined the market as the collection of FDIC-insured
                           institutions. However, this definition of the market excludes many types of institutions that
                           provide credit, including uninsured affiliates of FDIC-insured institutions, finance
                           companies, credit unions, and other institutions that are not FDIC-insured. Capital markets
                           are another source of funds for some market participants. Thus, the HHIs we calculate
                           likely overstate the amount of concentration in loan markets.




                           Page 38                                             GAO-12-160 Bank Holding Company Act
Table 5: HHI of Concentration among FDIC-insured Institutions in Loan Markets, 2010

Loan type
Commercial, industrial, and agricultural production loans                                           443
Construction and land development loans                                                             207
Consumer loans other than credit card loans                                                         696
Credit card loans                                                                                  1,479
Leases                                                                                              712
Multifamily, commercial, and agricultural real estate                                               125
Residential mortgages                                                                               645
Total loans and leases                                                                              477
Source: GAO analysis of data from FDIC, FRB, OCC, OTS, SEC, and SNL Financial.

Note: Cells contain the HHI for loan markets, where the market is defined as the collection of FDIC-
insured institutions. The HHI is calculated by summing the squared market shares of every firm in the
market. We defined a firm as a group of institutions with the same parent company. For standalone
institutions that do not have a parent company, the firm is the institution itself. The HHI ranges from
10,000 to a number approaching 0, with higher values indicating a more concentrated market.
Department of Justice and Federal Trade Commission guidelines as of August 19, 2010, suggest that
an HHI between 0 and 1,500 indicates that a market is not concentrated, an HHI between 1,500 and
2,500 indicates moderately concentrated, and an HHI greater than 2,500 indicates high
concentration, although other factors also play a role in determining market concentration. This
definition of the market excludes other providers of credit, including uninsured affiliates of FDIC-
insured institutions, finance companies, credit unions, and other institutions that are not FDIC-
insured. Our estimates may be too high or too low, depending on the numbers and sizes of the credit
providers we excluded.


If the exemptions were removed, some exempt institutions might exit the
credit market and stop making loans. As previously discussed,
representatives from some ILCs and limited-purpose credit card banks
owned by commercial parent companies indicated that their parent
companies would likely divest themselves of their exempt institutions if
the exemptions were removed. To estimate the effect of the divestment of
grandfathered S&Ls owned by commercial companies, we estimated the
change in the HHI for each loan market in alternative scenarios in which
all grandfathered S&Ls, all ILCs, or all limited-purpose credit card banks
ceased making loans and transferred the loans on their balance sheets to




Page 39                                                               GAO-12-160 Bank Holding Company Act
the firms remaining in the market. 54 In the first scenario, we assumed that
exiting institutions’ loans were distributed proportionally among all
remaining firms. In the second scenario, we assumed that the exiting
institutions’ loans were acquired by the largest remaining firm. 55 The
estimated changes in the HHIs indicated that the overall loan market was
unlikely to become concentrated in any of these scenarios. Even in the
event that all grandfathered S&Ls, all ILCs, or all limited-purpose credit
card banks exited the credit market, the remaining firms would still have
little market power and thus little ability to increase loan prices or reduce
the quantity of loans available. In every market we analyzed, except credit
card loans, estimated changes in the HHIs indicated that these markets
were also unlikely to become concentrated in similar scenarios. However,
our definition of the market excludes other providers of credit, including
uninsured affiliates of FDIC-insured institutions, finance companies, credit
unions, and other institutions that are not FDIC-insured. Our estimates
may be either overstated or understated, depending on the number and
sizes of the credit providers we excluded.

Although available data suggest a degree of concentration in the credit
card loan segment, the likely impact of removing the exemptions on this
market varies across institution types. We found that the HHI for the
market for credit card loans in 2010 was close to the threshold for
moderate concentration. However, under current conditions, estimated
changes in the HHI were small—less than 100—in scenarios in which all



54
  These scenarios do not apply to S&Ls that are not subsidiaries of grandfathered unitary
S&L holding companies because these S&Ls are either not subsidiaries of holding
companies or are subsidiaries of nongrandfathered S&L holding companies. S&Ls that are
not subsidiaries of holding companies do not have a holding company that would be
affected if the exemptions were removed. S&L holding companies that are not
grandfathered unitary S&L holding companies are subject to activity restrictions that are
similar to those for financial holding companies and cannot engage in commercial
activities. These S&L holding companies would likely have to make fewer adjustments to
their activities than grandfathered unitary S&L holding companies that engage in
commercial activities or parent companies of ILCs and limited-purpose credit card banks
that engage in commercial activities if the exemptions were removed.
55
  Exempt institutions and their parent companies have a variety of options for complying
with the BHC Act in the event that the exemptions are removed. The likelihood that an
exempt institution will exit the credit market depends on a variety of factors, including its
specific exemption, whether or not it has a parent company, and, if it does, the type of
activities in which its parent company engages. Thus, the purpose of this exercise is to
establish an upper bound on the effect that removing the exemptions is likely to have on
credit market concentration.




Page 40                                               GAO-12-160 Bank Holding Company Act
                                ILCs or all limited-purpose credit card banks ceased making loans and
                                transferred their portfolios to other FDIC-insured institutions. Removing
                                the exemptions for these institutions would likely not lead to significant
                                increases in market power in the credit card loan market. In contrast, the
                                HHI for the credit card loan market increased by more than 100 in
                                scenarios in which grandfathered S&Ls ceased making credit card loans
                                and transferred their portfolios to other FDIC-insured institutions. In these
                                scenarios, the increase in concentration in the credit card loan market
                                could be large enough to significantly increase market power for some of
                                the remaining firms and might lead to price increases or reductions in
                                availability of credit card loans. Once again, this definition of the market
                                excludes other providers of credit, including uninsured affiliates of FDIC-
                                insured institutions, finance companies, credit unions, and other
                                institutions that are not FDIC-insured. Our estimates may be either
                                overstated or understated, depending on the number and sizes of the
                                credit providers we excluded.

Exempt Institutions Expressed   Some representatives of exempt institutions also expressed concern that
Concerns about the Impact on    removing the exemptions could increase concentration in the market for
Certain Markets of Removing     credit card loans and reduce the availability of credit in certain niche
the Exemption                   markets. Representatives from five limited purpose credit card banks and
                                several ILCs and their parent companies reported that if the exemptions
                                were removed, the parent company would most likely divest itself of the
                                credit card bank or ILC rather than convert to a bank holding company.
                                As a result of divestment, some stated that their credit portfolios would
                                most likely be acquired by large credit card issuers or banks, argued that
                                divestment BHC Act exempt institutions could potentially increase credit
                                market concentration, or restrict access to credit for some customers.
                                Two exempt institutions said that credit to borrowers with limited access
                                to general purpose credit would be affected.

                                Representatives from several ILCs and two credit card banks also told us
                                that they made a significant proportion of loans in niche markets, including
                                student loans, small business loans, and vehicle and equipment loans and
                                leases to businesses and consumers involved in activities such as
                                specialized retail sales, insurance, transportation services, and taxi cab
                                operations. Representatives from 3 exempt institutions and their parent
                                companies also indicated that they offered specific credit products that
                                commercial banks did not offer and served customers that commercial
                                banks typically did not serve. One large credit card issuer told us that it




                                Page 41                                     GAO-12-160 Bank Holding Company Act
had developed cobranded credit card arrangements for certain businesses,
such as a small customer machinery tool manufacturer, and designed
programs to serve a particular demographic for a particular retailer. 56 This
credit card issuer told us that it had invested substantial resources in
developing a user friendly, secure, and reliable nationwide structure
customized to a particular group in order to win cobranding relationships
with retailers in niche markets. However, one academic we spoke with said
that traditional banks and other lenders would likely not expand into niche
consumer credit markets, because these institutions lacked the market
expertise of such credit card banks and ILCs. The lack of data on activity in
niche markets prevented us from measuring concentration and estimating
potential changes to it in scenarios in which exempt institutions ceased to
make loans. Representatives from some exempt institutions also
expressed concerns about the availability of credit to certain niche markets
if the exemptions were removed.

Federal Reserve officials told us that they believed that credit would
continue to be available to creditworthy customers, even if the
exemptions were removed and some institutions no longer provided
credit. When we discussed the issue of credit availability in niche markets
with the Federal Reserve, an official explained that the agency generally
used FDIC’s Call Report data to analyze credit markets and that the
reports did not include data on niche credit markets. Although Federal
Reserve officials acknowledged that removing the exemptions for credit
card banks and ILCs could affect the price and quantity of credit available
in some niche markets in which those institutions operated, they expected
that other financial institutions would step in and make credit available to
qualified borrowers at prices determined by the market. The officials
stated that they had not seen any data supporting the idea that exempt
institutions offered better terms than commercial banks. Moreover, they
stated that companies that currently owned exempt institutions could
continue to provide credit to their customers through institutions without
insured deposits, such as finance companies, which are not permitted to
have insured deposits. One example of this type of nonbank finance
company is the Ford Motor Credit Company, a wholly owned subsidiary of



56
  Cobranded credit cards involve partnerships between financial institutions and
unaffiliated organizations, generally for-profit organizations such as airlines, automobile
manufactures, and retailers. Like an affinity program, a contractual agreement governs the
cobranded relationship, and the cobranded card usually carries the partner’s logo.




Page 42                                            GAO-12-160 Bank Holding Company Act
                             the Ford Motor Company that finances Ford automobiles and supports
                             Ford dealers but does not accept FDIC-insured deposits.


Views Varied on How          Representatives from three exempt institutions stated that if the
Removing the Exemptions      exemptions were removed, they would see no additional improvement in
Would Impact Institutions’   safety and soundness. Other exempt institution representatives explained
                             that they did not consider consolidated supervision a stronger model than
Safety and Soundness and     the FDIC and state regulator model for exempt institutions. In addition to
Financial System Stability   not improving safety and soundness, some representatives from exempt
                             institutions stated that removing the exemptions would likely result in
                             further credit market concentration. For example, representatives from a
                             limited-purpose credit card bank noted that their share of the market
                             would likely be absorbed by large credit card issuers as their holding
                             company would likely divest their institution if the exemptions were
                             removed.

                             OCC officials have not expressed concerns about the sufficiency of the
                             current oversight of exempt institutions and FDIC officials acknowledged
                             the safety and soundness benefits of consolidated supervision. Federal
                             Reserve and Treasury officials maintained that the safety and soundness
                             of exempt institutions would be improved if the BHC Act exemptions were
                             removed because exempt institutions—and their holding companies—
                             would be subject to consolidated supervision. Consolidated supervision
                             allows regulators to understand an organization’s structure, activities,
                             resources, and risks, and to address financial, managerial, operational, or
                             other deficiencies before they pose a danger to subsidiary depository
                             institutions. However, Federal Reserve officials acknowledged that
                             consolidated supervision needed to be improved in light of the financial
                             problems experienced by several bank holding companies during the
                             2007-2009 financial crisis but noted that they had learned many lessons
                             from the crisis. For example, according to the Federal Reserve officials,
                             regulated institutions, particularly large U.S. banking organizations, had
                             complained to federal banking regulators, including the Federal Reserve,
                             about unregulated entities taking over more of their business. Their
                             concerns and influence contributed to a less than a rigorous application of
                             safety and soundness standards by federal regulators, which was one of
                             the causes for the recent financial crisis. Representatives from a former
                             ILC holding company that became a bank holding company agreed with
                             the Federal Reserve and Treasury’s view on the merits of subjecting
                             exempt institutions to consolidated supervision, noting, for example, that
                             their holding company was now required to implement more robust risk
                             management systems than it had previously maintained.


                             Page 43                                   GAO-12-160 Bank Holding Company Act
Federal Reserve officials also stated that financial system stability would
improve if the exemptions from the BHC Act were removed. They noted
that the risk posed by the exempt institutions should not be discounted
based on their relative size and small number of the institutions, as the
size and number of the institutions could change in the future. For
example, Federal Reserve officials told us that if the exemption were not
removed and the Dodd-Frank moratorium expired, the number and size of
ILCs could grow to the much higher levels that they had reached prior to
the financial crisis. Furthermore, Federal Reserve officials noted that
maintaining these exemptions resulted in differing regulatory oversight,
raising questions about whether the exemptions provide an unfair
competitive advantage. For example, holding companies of exempt
institutions (aside from S&L holding companies) are not subject to the
same level of scrutiny as bank holding companies—despite enjoying the
benefits of being FDIC insured. Federal Reserve officials also cited other
potential competitive concerns introduced by maintaining the exemptions.
For example, a large company that owns an exempt insured depository
institution could direct that institution to (unfairly) deny credit to the parent
company’s competitors. Moreover, the parent company could encourage
the affiliated exempt insured depository institution to offer loans to the
company’s customers based on terms not offered to its competitor’s
customers.

The impact of removing the exemption and addressing risks posed by
exempt institutions varies. For example, the Dodd-Frank Act requires the
holding companies for S&Ls, which are by far the largest in number and
size, to be supervised by the Federal Reserve. S&L holding companies
will be subject to capital requirements and other regulatory requirements
similar to those applicable to bank holding companies. In contrast, the
other exempt institutions are few in number and size, but their holding
companies are not subject to Federal Reserve’s supervision. In addition,
the banking activities of the exempt institutions vary—for example, ILCs
conduct activities similar to those of full-service commercial banks and
limited-purpose credit card banks conduct few banking activities—and
these activities carry different risks. The moratorium on approving federal
deposit insurance for ILCs, credit card banks, and trust banks is set to
expire in 2013. Federal Reserve officials told us that they plan to continue
to watch changes in the number or size of exempt institutions, as they
have previously, consistent with their position that the exemptions
represent gaps in the regulatory structure which may pose risks to the
financial system. They also said they would bring forward any concerns
about exempt institutions which may pose a risk to financial system
stability to FSOC. Ultimately, the decision to remove the BHC Act


Page 44                                       GAO-12-160 Bank Holding Company Act
                     exemptions is a policy decision that involves trade-offs among a number
                     of competing considerations, including potentially increasing
                     concentration in certain credit markets and decreasing consumer choice
                     and the availability of credit in certain regions and credit markets and
                     addressing existing regulatory gaps and potential competitive impacts.


                     We provided a draft of this report to the Federal Reserve, FDIC, OCC, the
Agency Comments      New York State Department of Financial Services, and Treasury for their
and Our Evaluation   review and comment. Treasury provided written comments that have
                     been reprinted in appendix III. Treasury agreed with our description of
                     the agency’s views on the exemption from consolidated Federal Reserve
                     supervision for holding companies owning companies exempt from the
                     BHC Act definition of bank. In addition, Treasury noted that it
                     recommends that the appropriate federal agencies maintain continued
                     oversight to the extent legally permissible within their respective existing
                     authorities over all holding companies owning insured depository
                     institutions. We also received technical comments from the New York
                     State Department of Financial Services, FDIC, and OCC, which we
                     incorporated as appropriate.

                     We are sending copies of this report to the appropriate congressional
                     committees and to the relevant agencies. This report will also be available
                     at no charge on our website at http://www.gao.gov.

                     Should you or your staff have questions concerning this report, please
                     contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for
                     our Offices of Congressional Relations and Public Affairs may be found
                     on the last page of this report. Key contributors to this report are listed in
                     appendix IV.




                     A. Nicole Clowers
                     Director
                     Financial Markets and
                        Community Investment




                     Page 45                                      GAO-12-160 Bank Holding Company Act
Appendix I: Objectives, Scope, and
                             Appendix I: Objectives, Scope, and
                             Methodology



Methodology

                             This report examines (1) the number of certain institutions in the U.S.
                             banking system that are exempt from the definition of bank in the Bank
                             Holding Company Act (BHC Act) and identifies general characteristics of
                             these institutions; (2) the federal regulatory system for the exempt
                             financial institutions and views of exempted entities; and (3) the potential
                             implications of subjecting holding companies for the exempt institutions to
                             the BHC Act relating to the types of activities in which such institutions
                             and their holding companies may engage, the availability and allocation of
                             credit, the stability of the financial system and the economy, and the safe
                             and sound operations of such institutions.


Number of Institutions and   To determine the extent to which certain financial institutions were
General Characteristics      exempt from the BHC Act, we requested data from Federal Deposit
                             Insurance Corporation (FDIC), Board of Governors for the Federal
                             Reserve System (Federal Reserve), Office of the Comptroller of the
                             Currency (OCC), and the Office of Thrift Supervision (OTS) relating to the
                             number of exempt institutions, their geographic location, their asset size,
                             and the parent holding company. We also interviewed officials from the
                             FDIC and OCC to obtain their understanding of the exemptions listed in
                             the BHC Act. Once we established the type of institutions that were
                             exempted from the BHC Act, we collected data from the FDIC, Federal
                             Reserve, and OCC on these institutions from 2006 through 2010. The
                             data included: asset size, geographic location, and primary federal
                             regulators. We also interviewed the state banking departments of
                             California, Nevada, New York, and Utah to collect information on the
                             industrial loan companies (ILC) and municipal deposit banks, which are
                             exempt from the definition of bank under the BHC Act and are state-
                             chartered institutions. We tested the reliability of the data provided to us
                             by the federal banking regulators and determined it to be sufficiently
                             reliable for our purposes. To do this, we interviewed the regulators on
                             how they identified institutions that were exempt from the BHC Act and
                             what process they used to identify the institutions and then compared the
                             lists from the federal banking regulators. As part of this comparison, we
                             looked for any duplicates or inconsistency between the regulators.

                             To determine whether ILCs, limited-purpose credit card banks, municipal
                             deposit banks, and trust banks were owned by commercial holding
                             companies, we reviewed information from the federal bank regulators on
                             the holding companies of the exempt institutions and analyzed public
                             information, if available, on the holding companies to identify the business
                             segments of the company. The types of publicly available information that
                             we examined included Securities and Exchange Commission’s (SEC)


                             Page 46                                    GAO-12-160 Bank Holding Company Act
                            Appendix I: Objectives, Scope, and
                            Methodology




                            filings and company annual reports. Using this information, we identified
                            the annual gross revenue and the business segments that created the
                            revenue. Using the activities listed in Section 4 (k) of the BHC Act, we
                            compared the activities of the holding company listed in the public
                            documents to identify the activities considered financial in nature and then
                            determined the extent to which their 2010 annual gross revenue was
                            produced by financial activities. In accordance with the Dodd-Frank Wall
                            Street Reform and Consumer Protection Act, if 15 percent or more of a
                            company’s activities were financial, we classified it as noncommercial.
                            Companies that derived less than 15 percent of their revenue from
                            financial activities were classified as commercial.


Federal Regulatory System   To describe the federal regulatory system for the exempt financial
                            institutions, we reviewed 18 examinations of exempt institutions with
                            assets of $1 billion or more that FDIC and OCC conducted in 2009 and
                            2010. We selected examinations for review based on the institutions’
                            asset size, choosing larger institutions because of the potential risks they
                            posed. The examinations we reviewed included 11 ILCs and 7 limited-
                            purpose credit card banks. Of the OCC-supervised limited-purpose credit
                            card banks, only one institution met our criteria so we reviewed the most
                            recent examinations of the OCC-supervised limited-purpose credit card
                            banks. Our review of examinations did not include trust banks and
                            municipal deposit banks because their asset sizes were much lower than
                            $1 billion. We focused on the larger institutions because we determined
                            that the regulators generally dedicated more resources to them, such as
                            placing examiners onsite and concluded that if certain supervisory
                            practices are not taken on the larger institutions, then they would not
                            likely be implemented for the smaller institutions. We reviewed
                            documentation from FDIC, the Federal Reserve, and OCC about their
                            supervision practices, including information from both OCC and the
                            Federal Reserve on how they plan to carry out their new responsibilities
                            for savings and loans (S&L) and their holding companies. We interviewed
                            officials from FDIC, the Federal Reserve, OCC, and OTS regarding the
                            supervision of all BHC Act exempt institutions, including S&L and holding




                            Page 47                                    GAO-12-160 Bank Holding Company Act
                           Appendix I: Objectives, Scope, and
                           Methodology




                           company supervision and an academic who recently completed a study
                           on ILCs for a think tank organization. 1


Implications of Removing   To assess the extent to which credit markets are likely to be affected if
Exemptions                 the exemptions are removed, we calculated market shares for each type
                           of exempt institution in loan markets as of June 30, 2010. We defined the
                           market as the collection of all FDIC-insured institutions for which we could
                           obtain balance sheet data as of June 30, 2010. 2 We obtained lists of
                           FDIC-insured institutions from the Summary of Deposits (SOD) data
                           available on FDIC’s website. We obtained balance sheet data from each
                           institution’s Call Report or Thrift Financial Report from SNL Financial, a
                           financial industry database. Some institutions indicated that they were
                           subsidiaries of other institutions in the data and that their parent institution
                           reports consolidated balance sheet data for both institutions on the parent
                           institution’s balance sheet. In these cases, we removed the subsidiary
                           institution from the sample in these cases to avoid double-counting them.

                           We identified seven groups of institutions: (1) commercial banks and all
                           subsidiaries of bank holding companies, (2) limited-purpose credit card
                           banks, (3) ILCs, (4) municipal deposit banks, (5) trust banks, (6) S&Ls
                           that are subsidiaries of grandfathered unitary savings and loan holding
                           companies (“grandfathered S&Ls”), and (7) other S&Ls. All institutions
                           that are subsidiaries of bank holding companies are in the first group. The
                           two groups of S&Ls are distinguished by the types of holding companies
                           of which they are subsidiaries. Prior to the enactment of the Gramm-
                           Leach-Bliley Act (GLBA) in 1999, unitary S&L holding companies could
                           generally operate without activity restrictions. GLBA restricted companies
                           that filed applications to acquire an S&L after May 4, 1999, to only
                           engage in activities permissible for S&L holding companies. Existing
                           unitary S&L holding companies were “grandfathered” and could continue
                           to engage in any type of financial or commercial activities. Thus, some
                           S&Ls are subsidiaries of grandfathered unitary S&L holding companies
                           that are not subject to activity restrictions, while other S&Ls are either



                           1
                            As of July 21, 2011, the Dodd-Frank Act abolished OTS, which formerly had the authority
                           to regulate and supervise federally chartered savings and loans associations and all S&L
                           holding companies and OTS was officially dissolved 90 days later (Oct.19, 2011).
                           2
                            SNL Financial is a private database of financial data of banking, financial services,
                           insurance and real estate.




                           Page 48                                              GAO-12-160 Bank Holding Company Act
Appendix I: Objectives, Scope, and
Methodology




subsidiaries of holding companies that are subject to activity restrictions
or are not subsidiaries of holding companies.

We obtained lists of limited-purpose credit card banks, ILCs, municipal
deposit banks, and trust banks as of September 30, 2010, or December
31, 2010, from FDIC, the Federal Reserve, and OCC. We then used
institution histories obtained from FDIC’s Bank Find website (Bank Find)
to adjust those lists to reflect institutions’ types as of June 30, 2010. We
used FDIC’s SOD data to identify S&Ls. To further identify grandfathered
S&Ls, we obtained a list of grandfathered unitary S&L holding companies
and their subsidiaries as of December 31, 2010, from OTS. Because the
unitary S&L holding companies were grandfathered in 1999, the savings
and loans that were their subsidiaries as of December 31, 2010, must
also have been their subsidiaries as of June 30, 2010. That is, an S&L
could not have become a subsidiary of a grandfathered unitary S&L
holding company between June 30, 2010, and December 31, 2010.
Finally, we used FDIC’s SOD data to identify commercial banks and all
institutions that are subsidiaries of bank holding companies. All
institutions that are subsidiaries of bank holding companies—including
limited-purpose credit card banks, ILCs, municipal deposit banks, S&Ls,
and trust banks—are put in the group containing commercial banks and
bank holding company subsidiaries.

We estimated each group’s share of the market for various types of loans,
including total loans and leases; construction and land development
loans; residential mortgage loans, multifamily, commercial, and
agricultural real estate loans; commercial, industrial, and agricultural
production loans; credit card loans; consumer loans other than credit card
loans; and leases. A group’s market share is equal to the total dollar
value of loans on the balance sheets of all institutions in the group as a
percent of the total dollar value of loans on the balance sheets of all
institutions in the market.

To assess the extent to which the price of credit and the quantity of credit
available are likely to be affected if the exemptions are removed, we
calculated the Herfindahl-Hirschman Index (HHI) of market concentration
in loan markets. The HHI is a key statistical indicator used to assess the
market concentration and the potential for firms to exercise market power.
The HHI reflects the number of firms in the market and each firm’s market
share, and it is calculated by summing the squares of the market shares
of each firm in the market. For example, a market consisting of four firms
with market shares of 30 percent, 30 percent, 20 percent, and 20 percent
has an HHI of 2,600 (900 + 900 + 400 + 400 = 2600). The HHI ranges


Page 49                                    GAO-12-160 Bank Holding Company Act
Appendix I: Objectives, Scope, and
Methodology




from 10,000 (if there is a single firm in the market) to a number
approaching zero (in the case of a perfectly competitive market). That is,
higher values of the HHI indicate a more concentrated market.
Department of Justice and Federal Trade Commission guidelines as of
August 19, 2010, suggest that an HHI between 0 and 1,500 indicates that
a market is not concentrated, an HHI between 1,500 and 2,500 indicates
that a market is moderately concentrated, and an HHI greater than 2,500
indicates that a market is highly concentrated, although other factors also
play a role in determining market concentration.

To calculate HHIs, we defined a firm as the collection of all FDIC-insured
institutions that are subsidiaries of the same parent company (for
institutions that are subsidiaries of parent companies) or the institution
itself (for institutions that are not subsidiaries of parent companies).
Parent companies of FDIC-insured institutions are either bank holding
companies, S&L holding companies, or other parent companies. We
identified bank holding company parents and all their subsidiaries for
each year using FDIC’s SOD data. We obtained lists of S&L holding
company parents and their OTS-regulated subsidiaries from OTS. Based
on data for 2011, we assumed that each savings bank that is not a
subsidiary of a bank holding company is either a standalone institution
without a parent company or is the only FDIC-insured subsidiary of its
parent holding company. We obtained data on other parent companies—
the nonbank holding company, non-S&L holding company parent
companies of some credit card banks, industrial loan companies, and
trust banks—for 2010 from FDIC and OCC. A limitation of this strategy is
that we may not have identified all the institutions that belong to the same
other parent company. As a result, our HHIs may understate the amount
of concentration in the market.

We calculated the HHI for the markets for various types of loans,
including total loans and leases; construction and land development
loans; residential mortgage loans; multifamily, commercial, and
agricultural real estate loans; commercial, industrial, and agricultural
production loans; credit card loans; consumer loans other than credit card
loans; and leases. We first calculated each firm’s market share as the
total dollar value of loans on the balance sheets of all institutions in the
firm as a percent of the total dollar value of loans on the balance sheets
of all institutions in the market. We then summed the squared market
shares of every firm in the market to obtain the HHI for that market.

For groups composed of grandfathered S&Ls (part of a unitary S&L
holding company), ILCs, and limited-purpose credit card banks, we


Page 50                                    GAO-12-160 Bank Holding Company Act
Appendix I: Objectives, Scope, and
Methodology




estimated the change in the HHI for each loan market in alternative
scenarios in which each group of exempt institutions ceases to make
loans and transfers the loans on its balance sheets among firms in the
market. In the first scenario, we assumed that the exiting institutions’
loans are distributed proportionally among remaining firms. In the second
scenario, we assumed that the exiting institutions’ loans are acquired by
the largest firm remaining in the market.

A limitation of including only FDIC-insured institutions in our market share
and HHI calculations is that we exclude many institutions that do not have
FDIC insurance but that provide credit, such as uninsured affiliates of
FDIC-insured institutions, credit unions, and finance companies. Capital
markets are another source of funds. Thus, our calculations may
overstate exempt institutions’ share of loan markets. Furthermore, our
calculations may either overstate or understate the amount of
concentration in loan markets, depending on the numbers and sizes of
the firms we are excluding.

Our analysis implicitly assumes loan markets are national markets, that
is, that credit provided by an institution is available to any potential
borrower, regardless of their respective geographic locations. We make
this assumption because subnational loan data are not readily available.
If loan markets are not national in scope, then our market share and
market concentration estimates are unlikely to represent those that we
would estimate for a specific subnational geographic region, such as a
state or metropolitan area. The market share and market concentration
estimates for some regions would likely be greater than our national
estimates, while others would likely be lower.

We assessed the reliability of all of the data used to determine the
potential implications of removing the exemptions and found that the data
were sufficiently reliable for our purposes. To do this, we interviewed the
regulators on how they identified institutions that were exempt from the
BHC Act and what process they used to identify the institutions and then
compared the lists from the federal banking regulators.

In addition to these quantitative analyses, we interviewed representatives
from 31 exempt institutions and representatives from the American
Bankers Association and the Independent Community Bankers
Association to learn more about their views regarding the BHC Act
exemptions and possible implications of the institutions losing their
exempt status. In addition, we interviewed representatives from two ILC
holding companies that recently became bank holding companies to


Page 51                                    GAO-12-160 Bank Holding Company Act
Appendix I: Objectives, Scope, and
Methodology




obtain their views on bank holding company supervision from the
perspective of a former ILC holding company. We selected the institutions
for interview based primarily on the size of the exemption institutions and
the commercial status of the holding company. We attempted to interview
the largest institutions and those which were held by holding companies
that would be considered commercial. We conducted a content analysis
of the qualitative information that we obtained from these interviews to
identify themes that emerged. We also interviewed FDIC, Federal
Reserve, OCC and Department of the Treasury officials to obtain their
views on the implications of removal the exemptions. In addition, we
interviewed three commercial banks, which are large credit card issuers,
to collect additional information on potential concentration in credit card
issuing if the exemptions were removed.

We conducted this performance audit between October 2010 and
January 2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 52                                   GAO-12-160 Bank Holding Company Act
Appendix II: Financial Institutions Exempt
                                          Appendix II: Financial Institutions Exempt
                                          under the Bank Holding Company Act and the
                                          Holding Company Commercial Status


under the Bank Holding Company Act and
the Holding Company Commercial Status
                                          Certain companies are exempt from the regulation as bank holding
                                          companies under the Bank Holding Company Act (BHC Act) because
                                          their subsidiaries do not meet the definition of a “bank” under the BHC
                                          Act. These exempt institutions include savings and loans (S&L), industrial
                                          loan corporations, limited-purpose credit card banks, municipal deposit
                                          banks, and trust banks. While S&L holding companies are not regulated
                                          under the BHC Act, after the Dodd-Frank Act, their treatment will be
                                          similar to that of bank holding companies. Therefore, we exclude S&Ls
                                          from this analysis. We identified 57 exempt institutions: 34 industrial loan
                                          corporation (ILC), 10 limited-purpose credit card banks, 10 municipal
                                          deposit banks, and 3 trust banks.


Industrial Loans                          Excluding S&Ls, ILCs comprise the largest number of institutions that rely
Corporations                              on the BHC Act exemption. As of September 30, 2011, there were 34
                                          ILCs (see table 6).

Table 6: Industrial Loan Corporations, as of September 30, 2011

Name                                            City                  State      Assets (in millions)   Holding company
UBS Bank USA                                    Salt Lake City        UT                   $31,465.2    Noncommercial


USAA Savings Bank                               Las Vegas             NV                    13,957.3    Noncommercial
Capmark Bank                                    Midvale               UT                     6,721.8    Noncommercial
BMW Bank of North America                       Salt Lake City        UT                                Noncommercial
                                                                                             9,320.6
Sallie Mae Bank                                 Murray                UT                     6,524.5    Noncommercial
GE Capital Financial                            Salt Lake City        UT                     8,423.8    Noncommercial
CapitalSource Bank                              Los Angeles           CA                     6,371.8    Noncommercial
Beal Bank                                       Las Vegas             NV                     5,958.1    Noncommercial
Woodlands Commercial Bank                       Salt Lake City        UT                     2,160.8    Noncommercial
Optumhealth Bank                                West Valley City      UT                     1,720.8    Noncommercial
Merrick Bank                                    South Jordan          UT                     1,148.3    Unknown
Wright Express Financial Services Corporation   Midvale               UT                     1,365.4    NonCommercial
Toyota Financial Savings Bank                   Henderson             NV                       799.9    Commercial


Centennial Bank                                 Fountain Valley       CA                       728.6    Noncommercial


Pitney Bowes Bank                               Salt Lake City        UT                       749,7    Commercial
Fireside Bank                                   Pleasanton            CA                       276.1    Noncommercial




                                          Page 53                                         GAO-12-160 Bank Holding Company Act
                                     Appendix II: Financial Institutions Exempt
                                     under the Bank Holding Company Act and the
                                     Holding Company Commercial Status




Name                                          City                    State         Assets (in millions)         Holding company
Finance Factors                               Honolulu                HI                             537.2       Unknown
Medallion Bank                                Salt Lake City          UT                             601.1       Noncommercial
Transportation Alliance Bank                  Ogden                   UT                             537.9       Unknown
World Financial Capital Bank                  Salt Lake City          UT                             596.9       Noncommercial
First Security Business Bank                  Orange                  CA                             490.4       Noncommercial
Community Commerce Bank                       Claremont               CA                             340.0       Unknown
Enerbank USA                                  Salt Lake City          UT                             436.4       Commercial
Circle Bank                                   Novato                  CA                             305.5       Noncommercial
Celtic Bank                                   Salt Lake City          UT                             219.5       Unknown
Balboa Thrift and Loan                        Chula Vista             CA                             202.0       Unknown
Finance & Thrift Co.                          Porterville             CA                             124.7       Noncommercial
WebBank                                       Salt Lake City          UT                              77.9       Noncommercial
LCA Bank Corporation                          Park City               UT                              65.1       Unknown
Rancho Santa Fe Thrift and Loan               San Marcos              CA                              42.9       Unknown
Target Bank                                   Salt Lake City          UT                              43.3       Commercial
Minnesota First Credit and Savings            Rochester               MN                              28.6       Unknown
Eaglemark Savings Bank                        Carson City             NV                              39.1       Commercial
First Electronic Bank                         Sandy                   UT                                7.5      Unknown
Total assets                                                                                  $102,389.0
                                     Source: FDIC.

                                     Note: Assets are as of June 30, 2011. FDIC is the federal regulator for all ILCs.




Limited-Purpose Credit               Limited-purpose credit card banks are also exempt under the BHC Act.
Card Banks                           As of September 30, 2011, there were 10 limited-purpose credit card
                                     banks (see table 7).




                                     Page 54                                                   GAO-12-160 Bank Holding Company Act
                                            Appendix II: Financial Institutions Exempt
                                            under the Bank Holding Company Act and the
                                            Holding Company Commercial Status




Table 7: Limited-Purpose Credit Card Banks, as of September 30, 2011

Name                            City                   State            Assets (in millions)                Federal regulator     Parent company
World Financial Network NB      Wilmington             DE                                $4,736.5           FDIC                  Noncommercial
World’s Foremost Bank           Sidney                 NE                                  3,305.5          FDIC                  Commercial
TCM Bank, N.A.                  Tampa                  FL                                     158.9         OCC                   Unknown
Target NB                       Sioux Falls            SD                                     111.9         OCC                   Commercial
Credit One Bank, N.A.           Las Vegas              NV                                      87.0         OCC                   Unknown
Credit First, N.A.              Brook Park             OH                                      27.0         OCC                   Commercial
Talbots Classics NB             Lincoln                RI                                      12.1         OCC                   Commercial
Cedar Hill NB                   Charlotte              NC                                      11.3         OCC                   Commercial
ITS Bank                        Johnston               IA                                        5.4        FDIC                  Unknown
DSRM National Bank              Albuquerque            NM                                        3.5        OCC                   Commercial
Total assets                                                                            $8, 459.1
                                            Sources: FDIC and OCC.

                                            Note: Assets are as of June 30, 2011 as more recent data were not available.




Municipal Deposit Banks                     Municipal deposit banks are another type of exempt financial institution.
                                            As shown in table 8, all 10 municipal deposit banks are located in
                                            New York.

Table 8: Municipal Deposit Banks, as of September 30, 2011

Name                                   City                                    State                   Assets (in millions)     Holding company
Flushing Commercial Bank               North New Hyde Park                     NY                                   $567.5      Noncommercial
Provident Municipal Bank               Montebello                              NY                                    422. 9     Noncommercial
Greene County Commercial               Catskill                                NY                                    161.6      Noncommercial
State Bank Of Chittenango              Chittenango                             NY                                    153.6      Noncommercial
Pathfinder Commercial Bank             Oswego                                  NY                                      52.9     Noncommercial
Pioneer Commercial Bank                Troy                                    NY                                      49.3     Noncommercial
PCSB Commercial Bank                   Brewster                                NY                                      40.3     Noncommercial
WSB Municipal Bank                     Watertown                               NY                                      32.0     Noncommercial
Berkshire Bank Municipal Bank          Albany                                  NY                                      35.5     Noncommercial
Emigrant Mercantile Bank               New York                                NY                                       3.8     Noncommercial
Total assets                                                                                                       $1,519.4
                                            Source: New York State Department of Financial Services.

                                            Note: FDIC is the federal regulator for all New York municipal deposit banks because they are state-
                                            chartered by the state of New York. Assets are as of June 30, 2011, as more recent data were not
                                            available.




                                            Page 55                                                                GAO-12-160 Bank Holding Company Act
                                        Appendix II: Financial Institutions Exempt
                                        under the Bank Holding Company Act and the
                                        Holding Company Commercial Status




Trust Banks                             Trust banks are another type of exempt financial institution. Trust banks
                                        act as fiduciaries and as of September 30, 2011, there were three in
                                        operation (see table 9).

Table 9: Federal Chartered Trust Banks, as of September 30, 2011

Name                                      City         State       Assets (in millions) Federal Regulator               Parent company
Invesco National Trust Company            Atlanta      GA                         $147.1 OCC                            Noncommercial
Legg Mason Investment                     Baltimore    MD                            67.7 OCC                           Noncommercial
Fidelity Management and Trust Company     Boston       MA                          103.5 FDIC                           Unknown
Total assets                                                                      $318.3
                                        Source: OCC.

                                        Note: Assets are as of June 30, 2011, as more recent data were not available.




                                        Page 56                                                  GAO-12-160 Bank Holding Company Act
Appendix III: Comments from the
              Appendix III: Comments from the Department
              of the Treasury



Department of the Treasury




              Page 57                                      GAO-12-160 Bank Holding Company Act
Appendix III: Comments from the Department
of the Treasury




Page 58                                      GAO-12-160 Bank Holding Company Act
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov
GAO Contact
                  In addition to the individual named above Andrew Pauline, Assistant
Staff             Director; Tarik Carter; Emily Chalmers; William Chatlos; Rachel
Acknowledgments   DeMarcus; Nancy Eibeck, Fred Jimenez; Courtney LaFountain; Marc
                  Molino; Tim Mooney; and Bob Rieke made major contributions to this
                  report.




(250566)
                  Page 59                                 GAO-12-160 Bank Holding Company Act
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