November/December 1996
Regulatory Streamlining: The Fed Makes Its Move
Banking Strategies
In a long-overdue move, the Board of Governors of the Federal Reserve System in August unveiled proposals to stream-line the regulation of bank holding companies. While the measures fall short of what could be achieved through reform legislation, they nevertheless contain a number of significant new regulatory initiatives and represent a major change in the Board's approach to bank holding company regulation.
Extensively rewriting Regulation Y, which governs bank holding companies, the Federal Reserve Board proposed to streamline procedures for regulatory applications and notices, broaden the scope of permissible nonbanking activities, and eliminate numerous regulatory constraints, including restrictions on the tying of products and services by bank holding companies and their nonbank subsidiaries.
The published proposals, on which the Fed Board is currently seeking comment, apparently came in response to a suggestion by James Leach, Chairman of the House Banking Committee. In a June missive, Leach conceded Congress had failed to reform the Glass-Steagall Act, urging the Board to undertake regulatory relief at the agency level.
To be sure, many of the proposed changes are housekeeping items. They update Regulation Y to reflect actions previously taken by the Board and belatedly give bank holding companies powers already granted to commercial banks by the Office of the Comptroller of the Currency (OCC) and various states. Moreover, the proposals do not address some major banking powers issues, such as sales of annuities and insurance, which the OCC has been willing to tackle.
Taking a New Approach
In a notable potential departure from the past, however, the Board said it would be "proactive" in authorizing new activities. The Board said bank holding companies will be permitted to conduct nonbanking activities "to the fullest extent possible" under the Bank Holding Company (BHCA), pledging that Regulation Y will be administered in a manner "sufficiently flexible to allow for industry changes in permissible activities without creating unnecessary additional filing burdens."
Going forward, the Board said, each restriction in Regulation Y will be reevaluated in light of developments in the marketplace. The Board said it will "actively track" OCC and state actions conferring new power on banks, promising that bank holding companies will not be prohibited from engaging in activities in which their commercial bank subsidiaries are free to engage.
The Board said supervisory principles governing the conduct of activities will be: 1) clearly explained; 2) adjusted to reflect market developments and the Board's experience in supervising the activity; and 3) uniformly applied on an interagency basis.
Significantly shifting its regulatory approach, the Board is proposing to allow bank holding companies to file a one-time notice of intent to engage in all of the activities permitted under Regulation Y. This action would clear the regulatory bottlenecks institutions frequently encounter with Regulation Y notices, which currently must be filed each time a bank holding company wants to engage in a new activity.
The Board is proposing to remove restrictions on currently permissible activities and expand the types of activities permitted under Regulation Y.
Expanded Activities
Bank holding companies would be permitted to trade derivative instruments such as futures, options and swaps for their own account so long as the underlying assets are not bank ineligible securities. The proposals would significantly broaden the date processing powers of bank holding companies by allowing them to derive up to 30% of data processing revenues from sources other than the processing of financial, banking and economic data. Bank holding companies also could expand their management consulting clientele beyond depository institutions, deriving up to 30% of their management consulting revenues from nondepository clients.
Breaking from the past, the Board would rescind Regulation Y restrictions on tying of products and services by bank holding companies and their non-bank subsidiaries, although the statutory anti-tying restrictions would remain applicable to bank subsidiaries.
The Regulation Y overhaul also would facilitate bank mergers and acquisitions, establishing a 15-day, streamlines notice procedure for mergers and acquisitions by well-capitalized and well-managed bank holding companies rates at least "satisfactory" on examinations for compliance with the Community Reinvestment Act.
Although the Federal Reserve Board's proposals would make many significant changes in bank holding company regulation, they do not address several areas where bank holding company powers could be further broadened. Unlike national banks, for example, bank holding companies still could not sell annuities and life insurance. Municipal revenue bond underwriting and "best efforts" underwriting would still be treated as ineligible activities, permissible only in Section 20 subsidiaries. Moreover, the Board did not propose relaxing its restrictive interpretation of "control" under the BHCA, continuing to limit the ability to bank holding companies to acquire nonvoting investment and engage in joint ventures with other firms.
Extensively rewriting Regulation Y, which governs bank holding companies, the Federal Reserve Board proposed to streamline procedures for regulatory applications and notices, broaden the scope of permissible nonbanking activities, and eliminate numerous regulatory constraints, including restrictions on the tying of products and services by bank holding companies and their nonbank subsidiaries.
The published proposals, on which the Fed Board is currently seeking comment, apparently came in response to a suggestion by James Leach, Chairman of the House Banking Committee. In a June missive, Leach conceded Congress had failed to reform the Glass-Steagall Act, urging the Board to undertake regulatory relief at the agency level.
To be sure, many of the proposed changes are housekeeping items. They update Regulation Y to reflect actions previously taken by the Board and belatedly give bank holding companies powers already granted to commercial banks by the Office of the Comptroller of the Currency (OCC) and various states. Moreover, the proposals do not address some major banking powers issues, such as sales of annuities and insurance, which the OCC has been willing to tackle.
Taking a New Approach
In a notable potential departure from the past, however, the Board said it would be "proactive" in authorizing new activities. The Board said bank holding companies will be permitted to conduct nonbanking activities "to the fullest extent possible" under the Bank Holding Company (BHCA), pledging that Regulation Y will be administered in a manner "sufficiently flexible to allow for industry changes in permissible activities without creating unnecessary additional filing burdens."
Going forward, the Board said, each restriction in Regulation Y will be reevaluated in light of developments in the marketplace. The Board said it will "actively track" OCC and state actions conferring new power on banks, promising that bank holding companies will not be prohibited from engaging in activities in which their commercial bank subsidiaries are free to engage.
The Board said supervisory principles governing the conduct of activities will be: 1) clearly explained; 2) adjusted to reflect market developments and the Board's experience in supervising the activity; and 3) uniformly applied on an interagency basis.
Significantly shifting its regulatory approach, the Board is proposing to allow bank holding companies to file a one-time notice of intent to engage in all of the activities permitted under Regulation Y. This action would clear the regulatory bottlenecks institutions frequently encounter with Regulation Y notices, which currently must be filed each time a bank holding company wants to engage in a new activity.
The Board is proposing to remove restrictions on currently permissible activities and expand the types of activities permitted under Regulation Y.
Expanded Activities
Bank holding companies would be permitted to trade derivative instruments such as futures, options and swaps for their own account so long as the underlying assets are not bank ineligible securities. The proposals would significantly broaden the date processing powers of bank holding companies by allowing them to derive up to 30% of data processing revenues from sources other than the processing of financial, banking and economic data. Bank holding companies also could expand their management consulting clientele beyond depository institutions, deriving up to 30% of their management consulting revenues from nondepository clients.
Breaking from the past, the Board would rescind Regulation Y restrictions on tying of products and services by bank holding companies and their non-bank subsidiaries, although the statutory anti-tying restrictions would remain applicable to bank subsidiaries.
The Regulation Y overhaul also would facilitate bank mergers and acquisitions, establishing a 15-day, streamlines notice procedure for mergers and acquisitions by well-capitalized and well-managed bank holding companies rates at least "satisfactory" on examinations for compliance with the Community Reinvestment Act.
Although the Federal Reserve Board's proposals would make many significant changes in bank holding company regulation, they do not address several areas where bank holding company powers could be further broadened. Unlike national banks, for example, bank holding companies still could not sell annuities and life insurance. Municipal revenue bond underwriting and "best efforts" underwriting would still be treated as ineligible activities, permissible only in Section 20 subsidiaries. Moreover, the Board did not propose relaxing its restrictive interpretation of "control" under the BHCA, continuing to limit the ability to bank holding companies to acquire nonvoting investment and engage in joint ventures with other firms.
