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March 6, 2009
What is a Bank Holding Company? And How Many is Too Many?
By Cindy Ivanac-Lillig
So, the larger than life investment bank Goldman Sachs has become a bank holding company (BHC). What does that mean exactly? Since the Fed supervises and regulates BHCs, does this mean the Fed will supervise all of Goldman Sachs’s business activity?
No. It is my understanding that the Fed will examine the parent company’s books as well as the operations of the commercial banking subsidiaries (whatever they may end up looking like), but the investment banking business will continue to be supervised by the SEC. BHCs are allowed to hold many subsidiary businesses involved in a wide array of financial services. But BHCs are generally not allowed to own any non-banking activities nor even have voting shares in non-bank related companies.
This all seems pretty hum-drum until you look up the original BHC act of 1956 and realize that what a Bank could do in 1956 is quite a bit different than what it can do today. In 1933, landmark banking legislation known as the Glass Steagall Act banned banks from offering investment, commercial banking and insurance services. This legislation lasted more than 60 years but was basically supplanted in 1999 by the Gramm-Leach-Biley Act, which allowed major financial/banking sector consolidations such as Travelers insurance group merging with Citibank, etc.
As a result, BHCs are now financial service conglomerates. And what we have learned very recently is that perhaps most any financial service company can tack on a small commercial banking arm and file paperwork to become a BHC. I guess my question to you is whether you think this a problem. Will our major insurance companies be next to file as BHCs?
We all know the benefits to being a BHC in this environment and having a permanent relationship with the Fed (access to funding), but who is next, and where should it stop from the Fed’s perspective?
Posted by Cindy at March 6, 2009 12:05 AM
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Comments
To answer the question posed in the blog: For as long as the "top parent" of the structure that includes such BHC is willing to submit to Fed's Supervision and Regulation and for as long as the Fed has resources to (a) perform effective examinations and (b) consolidate the knowledge obtained from examinations to timely identify and potential sources of systemic risks, the proliferation of BHCs will not be a problem. Quite the opposite, a competition between the BHCs will lead to improved quality of service.
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