Regulation of banking outline

§20

• 
  not going to cover Glass Stegall Act §20
  

3. BHC then transferred bank subs dealing & underwriting of govt securities to nonbank subs so that nonbanks could engage in nongovt securities b/c would be engaged in nongovt securities principally based on gross amts of securities

a. govt securities lger portion of business anyways

b. Fed agreed that govt securities not securities per se

b. limitations

1. dealings in nongovt securities can’t be greater than 25% of gross dealings

c. Fed analysis that nonbank sub of BHC could engage in nongovt securities (dealing & underwriting)

1. still necessary to pass National Courier test b/c BHCA

2. direct finance is closely related to banking b/c of tech & mrkt changes have eliminated difference btwn intermediation & direct investmts

a. direct finance - security firms bringing supplier’s $ directly to users of $

1. some of their activities function just like loan, ie, commercial paper

b. intermediated finance - commercial banks in middle taking $ from suppliers & then deciding which user should get it

1. commercial banks having been losing core mrkts to securities firms

c. globalization factor

1. banks were already permitted to engage in nongovt securities underwriting & dealing aboard

2. foreign banks already engaging in nongovt securities are competing w/domestic banks

3. proper incident to bank via benefit/cost analysis

• 
  Fed attempt to gain Congressional repeal of Glass Stegall Act
  
• 
  Glass Stegall Act hasn’t been repealed thusfar b/c BHC have been able to engage in nongovt securities via loophold above
  
• 
  PTML - politics, tech, mrkts changes forcing legal changes
  

d. bank sub can’t engage in nongovt securities

1. politics - Fed retains juris over nonbank subs & doesn’t have authority over bank sub under BHCA

2. policy - don’t want to endanger FDIC but above real reason according to Miller

3. 
   high deference given to Board - not to be overturned if action is reasonable - Association of Data Processing Services v. Fed (1984) - Scalia
   
4. 
   protective measures
   

a. ask for Fed approval under BHCA §4(c)(a)

b. look under Regulation Y - provides laundry list of things that are ok that constitute generalized decisions in specific cases

-sum

1. 
   BHCA
   

a. covers permissible activities of

1. bank holding co.

2. bank holding co. nonbank subs

b. important b/c most banks currently are owned in a BHC structure

1. most banks therefore are under juris of Fed

2. relevant to M&A like Citicorp (lg BHC) & Travelers (insurance co.)

a. insurance activity fails under closely related tier 1 of test

b. loophole

1. under statute has 2yrs to rid itself of offending activities

2. Fed has authority to extend this period in 1yr incremts

3. hope that Congress will permit such activities w/in this 2yr period

• 
  lg mrkt place actors are forcing legal changes
  

a. change b/c mrkt change due to tech changes that have made insurance & banking very close activities

1. insurance co. - offering savings instrumts very similar to bank accounts

2. banks - issue stand-by LOC which is form of insurance, credit insurance

• 
  effects of politics, technology & mrkt changes on law
  

2. 
   courts act deferentially to Fed
   

d. other exemptions from BHCA general prohibition

-general rule - bank holding co. can’t acquire co. that is not bank

-exceptions

1. 
   co. whose activity is closely related to business of banking
   
2. 
   co. whose activity is only in holding or operating properties used substantially by bank sub of bank holding co. - 12 USC §1843(c)(1)
   
3. 
   co. that provide service to bank holding co. & bank sub - 12 CRF §225.104
   
4. 
   co. formed to liquidate assets acquired from bank holding co. or before 5/9/56 - 12 CRF §225.104
   

-exception to exception

1. 
   Fed can force bank holding co. to forgo protected activities if result in - 12 USC §1843(a)(2)
   

a. undue concentration of resources

b. decreased or unfair competition

c. unsound banking practices

2. 
   Fed can also limit activities of bank holding co. affiliates
   

e. activities restrictions on banks & bank sub w/in holding co. structure

-BHC bank subs

1. 
   bank subs not under BHCA & therefore not under Fed juris - Merchants National aka Independent Insurance Agents of America Inc. v. Board of Governors of Fed Reserve System (1990) - Newman
   

a. reason Fed gave up juris over bank subs of BHC

1. Fed didn’t want political fight w/state legislators

a. states had juris over state chartered banks unless preempted by Congress

2. under strict interp of statute

b. effect

1. BHC bank subs not under closely related to banking restrictions of BHCA but had potentially more latitude than BHC nonbank sub via state law

a. seems logical that should be other way around - nonbank subs should have more latitude in activities than bank subs

2. 
   nonsub of bank not under BHCA & therefore not Fed juris - Citicorp v. Board of Governors of Fed Reserve System (1991)
   

a. rationale although inconsistent w/administrative deference policy

1. not reasonable - since bank sub not under BHCA & Fed, its subs are not subject either

a. nonbank sub at issue here

b. if sub was bank, that would make bank sub of BHC into a BHC itself

2. political - FDIC & OCC (Comptroller of Currency) didn’t support b/c that would take some of their jurisdiction

3. 
   activities permitted to bank subs of BHC
   

a. were able to engage in insurance activity - Merchants National aka Independent Insurance Agents of America Inc. v. Board of Governors of Fed Reserve System (1990) - Newman

b. no longer permitted to engage in activities not permitted for nonbank subs unless FDIC approves & & it meets capital adequacy requiremts - Congress 1991 preemption of state laws

4. 
   activities permitted to nonbank sub of bank sub of BHC (sub generation 3)
   

a. can engage in insurance under state law - Citicorp v. Board of Governors of Fed Reserve System (1991)

1. DW permitted permits nonbank sub of bank sub of BHC or bank sub of BHC w/wall to engage in insurance

a. jurisdictions

1. st insurance commissioner has juris over insurance activity

2. st bank commissioner has juris over bank activity

b. goal

1. attempt to get around Regulation Y - covers activities that BHC subs can engage in

a. operating sub rule that permits sub generation 3 to engage in activity if bank sub1 can do it directly

• 
  didn’t let bank sub just to engage in it b/c cleaner to engage in activity in separately chartered co.
  

b. nonbank subs can’t engage in insurance b/c fails closely related test

2. trying to allow Citibank into DW to do insurance b/c state will benefit via jobs, fees, taxes

2. Fed position that operating sub rule not satisfied - bank sub1 can’t do directly b/c requiremt of wall

b. can’t engage in activities not permissible for subs of BHC so no insurance activity - Congress 1991 preemption of state laws

f. regulation of transactions among BHC affiliates

-BHC affiliates

1. 
   definition - its bank sub & nonbank sub
   
2. 
   general rule - Fed Reserve Act §23A, 23B
   

a. banks can deal w/other banks w/less restrictions

b. banks can deal w/other nonbanks w/more restrictions

• 
  Fed Reserve Act §23A - covered transactions btwn such parties that violate certain quantitative & qualitative limits prohibited
  
• 
  Fed Reserve Act §23B - requires terms of transactions involving banks or its sub to be comparable to arm’s length dealings
  

3. 
   concerns/rationale
   

a. fear of abuses of banks & FDIC

1. loaning to affiliates when bad investmt

2. when bank or BHC insolvent, transfer of assets to shareholders of BHC

3. favortism in making loans only to those co. w/relationships w/its affiliate

b. mitigators of subh abuses

1. capital adequacy requiremts

2. lending limits to each borrower

3. insider loan limits

4. policy that BHC to be source of strength for bank subs - should recapitalize bank

4. 
   Fischel, Rosenfield & Stillman
   

a. argumt - position that restrictions of transactions btwn affiliated co. illogical

1. basic party in interest is BHC

a. will transfer assets from bank sub to nonbank sub if economically in its best interest so therefore if good economic decision

b. argumts against their position

1. BHC still receives added benefit of access to lower cost capital of bank since it is fed insured

2. risk taking threat if entire BHC is insolvent

g. savings & loan holding companies (S&LHC)

-gen rule

1. 
   can have thrift holding co. & thrift subs but limited to activities permitted to thrift institutions
   
2. 
   not subject to limitations of thrift activities if meet following requiremts
   

a. have only one thrift sub

• 
  but can branch
  

b. meets qualified lending test - demonstrated commitmt to housing finance

• 
  effect - anyone can own thrift
  

THE END!!!!!!