In the wake of the Gramm-Leach-Bliley Act of 1999 ("GLBA"), the structural options available to engage in banking and other financial activities have expanded. GLBA permits qualifying companies that own a bank, "financial holding companies" ("FHCs"), to also own companies that engage in securities underwriting and dealing, insurance agency and underwriting, merchant banking or venture capital activities, the distribution of mutual funds, and securities lending. FHCs may hold any type of deposit-taking subsidiary, including a national bank, a state chartered bank, or a thrift or savings bank. To qualify as a FHC however, each of the company's deposit-taking subsidiaries must be well capitalized and well managed and have at least a "satisfactory" rating under the Community Reinvestment Act. FHCs also must satisfy capital standards imposed by the Federal Reserve Board.
Because of these constraints and other implications of bank regulation, a financial company interested in "banking" should make a careful evaluation of the strategic benefits of various structures to find the ones that best serve the company's business purpose. Also, although GLBA closed the door on commercial companies engaging in "banking" as a unitary thrift holding company, commercial enterprises can still engage in bank-like activities through some other structural options.
National Bank
A national bank chartered by the Office of the Comptroller of the Currency ("OCC") is authorized to engage in the business of banking and "all such incidental powers as shall be necessary to carry on the business of banking." The evolving "business of banking" standard is unimpaired by GLBA, so the OCC may continue to expand the activities permitted for national banks and their operating subsidiaries.
In addition, GLBA creates a new category of subsidiaries of banks. "Financial subsidiaries" may engage in all activities determined to be "financial" by the Department of the Treasury. Expressly excluded are insurance underwriting, real estate development and merchant banking activities.
GLBA requires a national bank (i) to deduct investments in financial subsidiaries from the bank's capital in computing capital ratios, (ii) to limit the total amount of investments in such subsidiaries and (iii) to limit dealings between the bank and its financial subsidiaries. In addition, the bank must be well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act. Operating subsidiaries do not trigger these constraints.
State-Chartered Bank
Most states have "wild card" statutes that permit banks chartered in that state to engage in all activities permissible for national banks. State banks could engage in principal activities broader than national banks, however, only to the extent permitted by the Federal Deposit Insurance Corporation ("FDIC") under section 24 of the FDI Act.
GLBA does not impair the flexibility of the states to define the scope of permissible activities for state banks and their subsidiaries, although GLBA imposes certain restrictions on new "financial subsidiaries" of state member banks.
GLBA requires a state member bank to be well capitalized and to meet CRA requirements before setting up a "financial" subsidiary. Unlike for a national bank, GLBA does not require a state member bank to be well managed, nor to limit its investment in the subsidiary.
GLBA preserves section 24 and allows FDIC to impose requirements on state nonmember banks in this area. FDIC is proposing to impose restrictions on state nonmember banks essentially identical to those GLBA imposes on state member banks.
Savings Banks or Thrifts
The unitary thrift charter continues to be a "banking" option for financial companies. Through such a structure, a financial company can engage in the same range of financial activities that are permissible for a FHC, although, in order to qualify for affiliation powers, a federal thrift must comply with the Qualified Thrift Lender ("QTL") test, keeping 65% of its assets in qualified thrift investments such as real estate, educational or credit card loans, or mortgage-backed securities.
GLBA does not require that a unitary thrift holding company satisfy the FHC conditions, nor does OTS impose capital requirements on thrift holding companies. A federal thrift and its holding company both are regulated by a single banking regulator and, also unlike a bank, a federal thrift that satisfies the QTL test may branch nationwide.
Industrial Loan Company
Any company may own an industrial loan company ("ILC") chartered in certain states that authorize such entities (e.g., Utah, California). ILCs typically have bank-like powers authorized by the chartering state and may offer all types of consumer and commercial loans. To avoid its parent becoming a bank holding company, the ILC cannot (1) accept demand deposits if the ILC has total assets of over $100 million, and (2) incur overdrafts at the Federal Reserve Banks on behalf of its affiliates. GLBA eases this overdraft limitation. ILCs can offer NOW accounts and MMDAs. An ILC, like a state bank, is limited in its ability to branch interstate and in the extent to which it can rely on its home state's law when serving customers in other states.
Credit Card Bank
Any company may own a bank that limits its activities to credit card operations and the acceptance of large denomination time and savings deposits. Credit card banks provide access to the federal payments system and may allow for preemption of state consumer credit laws limiting interest rates and fees. A credit card bank may engage only in credit card operations, may not accept demand deposits, generally may not accept savings or time deposits of less than $100,000, may maintain only one office that accepts deposits, and may not engage in the business of making commercial loans.
Finance Company
Any company may engage in consumer and commercial lending, leasing and a wide variety of other non-deposit taking banking activities without becoming a bank, becoming FDIC-insured, or becoming subject to regulation by federal banking regulators. Depending upon their activities, however, finance companies are frequently subject to state regulation and licensing, particularly if they engage in mortgage banking or retail installment sales finance. State laws often require the company to be incorporated in that state in order to provide loans to residents in that state, thus requiring a nationwide lending operation to have nearly 50 finance affiliates. Many activities of finance companies also are subject to the jurisdiction of the Federal Trade Commission.
Joint Venture
Any company may participate in a joint venture with one or more banks, for example a new entity jointly owned by the company and the bank(s). Historically, banking regulators required that bank(s) be able to veto the joint venture's participation in non-banking activities. With the passage of GLBA, a joint venture should be permitted the newly authorized financial activities. Yet to be resolved is whether bank investment in a joint venture will continue to be limited to a specific percentage of the bank's capital.
Minority Investment in Bank
A company may make a minority investment in a bank or bank holding company, but restrictions often will be imposed to ensure that the company does not "control" the banking organization. A purchase of less than 5% of the voting stock carries a presumption of non-control; a purchase up to 10% does not require prior regulatory approval but may result in restrictions later to prevent control; a purchase of 10% to 25% requires a bank regulatory filing with approval probably subject to such restrictions, including prohibitions on inter-company transactions.
Marketing Arrangements
Various marketing arrangements, including the sale of securities and insurance on bank premises, supermarket branches, and credit card co-brands, have been permitted by federal and state regulations for some time.
Because of these constraints and other implications of bank regulation, a financial company interested in "banking" should make a careful evaluation of the strategic benefits of various structures to find the ones that best serve the company's business purpose. Also, although GLBA closed the door on commercial companies engaging in "banking" as a unitary thrift holding company, commercial enterprises can still engage in bank-like activities through some other structural options.
National Bank
A national bank chartered by the Office of the Comptroller of the Currency ("OCC") is authorized to engage in the business of banking and "all such incidental powers as shall be necessary to carry on the business of banking." The evolving "business of banking" standard is unimpaired by GLBA, so the OCC may continue to expand the activities permitted for national banks and their operating subsidiaries.
In addition, GLBA creates a new category of subsidiaries of banks. "Financial subsidiaries" may engage in all activities determined to be "financial" by the Department of the Treasury. Expressly excluded are insurance underwriting, real estate development and merchant banking activities.
GLBA requires a national bank (i) to deduct investments in financial subsidiaries from the bank's capital in computing capital ratios, (ii) to limit the total amount of investments in such subsidiaries and (iii) to limit dealings between the bank and its financial subsidiaries. In addition, the bank must be well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act. Operating subsidiaries do not trigger these constraints.
State-Chartered Bank
Most states have "wild card" statutes that permit banks chartered in that state to engage in all activities permissible for national banks. State banks could engage in principal activities broader than national banks, however, only to the extent permitted by the Federal Deposit Insurance Corporation ("FDIC") under section 24 of the FDI Act.
GLBA does not impair the flexibility of the states to define the scope of permissible activities for state banks and their subsidiaries, although GLBA imposes certain restrictions on new "financial subsidiaries" of state member banks.
GLBA requires a state member bank to be well capitalized and to meet CRA requirements before setting up a "financial" subsidiary. Unlike for a national bank, GLBA does not require a state member bank to be well managed, nor to limit its investment in the subsidiary.
GLBA preserves section 24 and allows FDIC to impose requirements on state nonmember banks in this area. FDIC is proposing to impose restrictions on state nonmember banks essentially identical to those GLBA imposes on state member banks.
Savings Banks or Thrifts
The unitary thrift charter continues to be a "banking" option for financial companies. Through such a structure, a financial company can engage in the same range of financial activities that are permissible for a FHC, although, in order to qualify for affiliation powers, a federal thrift must comply with the Qualified Thrift Lender ("QTL") test, keeping 65% of its assets in qualified thrift investments such as real estate, educational or credit card loans, or mortgage-backed securities.
GLBA does not require that a unitary thrift holding company satisfy the FHC conditions, nor does OTS impose capital requirements on thrift holding companies. A federal thrift and its holding company both are regulated by a single banking regulator and, also unlike a bank, a federal thrift that satisfies the QTL test may branch nationwide.
Industrial Loan Company
Any company may own an industrial loan company ("ILC") chartered in certain states that authorize such entities (e.g., Utah, California). ILCs typically have bank-like powers authorized by the chartering state and may offer all types of consumer and commercial loans. To avoid its parent becoming a bank holding company, the ILC cannot (1) accept demand deposits if the ILC has total assets of over $100 million, and (2) incur overdrafts at the Federal Reserve Banks on behalf of its affiliates. GLBA eases this overdraft limitation. ILCs can offer NOW accounts and MMDAs. An ILC, like a state bank, is limited in its ability to branch interstate and in the extent to which it can rely on its home state's law when serving customers in other states.
Credit Card Bank
Any company may own a bank that limits its activities to credit card operations and the acceptance of large denomination time and savings deposits. Credit card banks provide access to the federal payments system and may allow for preemption of state consumer credit laws limiting interest rates and fees. A credit card bank may engage only in credit card operations, may not accept demand deposits, generally may not accept savings or time deposits of less than $100,000, may maintain only one office that accepts deposits, and may not engage in the business of making commercial loans.
Finance Company
Any company may engage in consumer and commercial lending, leasing and a wide variety of other non-deposit taking banking activities without becoming a bank, becoming FDIC-insured, or becoming subject to regulation by federal banking regulators. Depending upon their activities, however, finance companies are frequently subject to state regulation and licensing, particularly if they engage in mortgage banking or retail installment sales finance. State laws often require the company to be incorporated in that state in order to provide loans to residents in that state, thus requiring a nationwide lending operation to have nearly 50 finance affiliates. Many activities of finance companies also are subject to the jurisdiction of the Federal Trade Commission.
Joint Venture
Any company may participate in a joint venture with one or more banks, for example a new entity jointly owned by the company and the bank(s). Historically, banking regulators required that bank(s) be able to veto the joint venture's participation in non-banking activities. With the passage of GLBA, a joint venture should be permitted the newly authorized financial activities. Yet to be resolved is whether bank investment in a joint venture will continue to be limited to a specific percentage of the bank's capital.
Minority Investment in Bank
A company may make a minority investment in a bank or bank holding company, but restrictions often will be imposed to ensure that the company does not "control" the banking organization. A purchase of less than 5% of the voting stock carries a presumption of non-control; a purchase up to 10% does not require prior regulatory approval but may result in restrictions later to prevent control; a purchase of 10% to 25% requires a bank regulatory filing with approval probably subject to such restrictions, including prohibitions on inter-company transactions.
Marketing Arrangements
Various marketing arrangements, including the sale of securities and insurance on bank premises, supermarket branches, and credit card co-brands, have been permitted by federal and state regulations for some time.