Changes Brewing for Holding Company Oversight

  • Passing a regulatory reform bill through the House was a bruising, months-long fight that appeared ready to spin out of control. That battle may pale in comparison to the legislation's progress through the Senate.

    December 31

WASHINGTON — The notion that holding company oversight should be entrusted to a bank's primary supervisor is gaining traction on Capitol Hill.

The Senate Banking Committee is still debating the issue, but a growing chorus of former regulators and academics is arguing that the current practice of dividing oversight of a bank and its holding company between different agencies should be changed.

"My sense is that the Senate is leaning in the direction of unifying bank and bank holding company supervision," said former Federal Deposit Insurance Corp. Chairman William Isaac, now the chairman of the Secura Group of LECG, who was invited by a bipartisan group of Senate staffers to discuss the question.

The growing momentum behind the idea has alarmed the Obama administration, which has begun fiercely lobbying to retain the Federal Reserve Board's current authority over holding companies, according to sources.

"We continue to believe that the Federal Reserve is the appropriate supervisor for bank holding companies and the largest, most interconnected financial firms," said Neal Wolin, the deputy Treasury secretary, in an e-mail to American Banker.

Though Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the lead GOP panel member, are said to be leaning away from allowing the central bank any role in supervision, the views of the rest of the committee are unclear. Behind the scenes, committee staff members continue to debate the issue in the hope of finding a consensus.

But it is clear that the idea of entrusting oversight of holding companies to both the FDIC, in the case of state banks, and the new federal banking agency, in the case of nationally chartered banks, is attracting support.

The FDIC and OCC do not now have any bank holding company oversight, which is the Fed's exclusive responsibility. The central bank also directly regulates state banks that choose to become members of the Federal Reserve System, a role it is likely to lose even if it manages to retain holding company oversight.

Though the Fed wants to maintain both roles, it considers holding company oversight crucial for making monetary policy. Fed Vice Chairman Don Kohn said that the Fed's market and economics expertise complements its supervisory role in a way that cannot be replicated elsewhere.

"Having the Federal Reserve directly, hands-on involved in the supervisory process improves the supervisory process," he said in an interview Friday. "We are in the market every day in order to conduct monetary policy, and we need to be very aware of what is going on in the financial system and obviously the macroeconomy. We can bring a perspective to supervision that somebody who is focused just on supervising a set of institutions couldn't bring."

The Fed's ability to assess the collateral of borrowers at the discount window and to make strategic decisions in concert with other regulators during crises would be weakened if it had to rely on other agencies, he said.

"Could we have done this relying on the FDIC or the new national bank supervisor? I just don't think so," said Kohn. "I think you've got to have folks that work for you in-house that understand the goals and responsibilities of a particular organization, with whom the folks at the top of the organization … who are managing the crisis feel comfortable. I don't think it would work very well separately."

The Fed has at least one important ally in addition to the administration: House Financial Services Committee Chairman Barney Frank. In an interview with CNBC last week, the Massachusetts Democrat said he was open to curbing the Fed's power but does not favor taking away its supervisory role.

"When it comes to regulating bank activity, I think it's a mistake to take that away from the Fed," he said.

But a growing roster of former regulators and key academics are challenging that view. Alice Rivlin, a former Fed vice chairman and now a senior fellow at the Brookings Institution, said the central bank should be a systemic-risk regulator but does not need to supervise all holding companies.

"It should have access to all the data … , but I don't think they have to be the regulator," she said.

Many former regulators said having one regulator deal with both the bank and its holding company is logical.

"It obviously makes a lot of sense," said Robert Clarke, a former comptroller of the currency and now a senior partner at Bracewell & Giuliani LLP. "It's always been inefficient to have the primary federal regulator, whether it be the FDIC or the OCC, supervising the bank and then having the Fed supervising the holding company."

He pointed to the Fed's supervision of state member banks and their holding companies as a positive example.

"They know everything there is to know, and they can much more easily deal with whatever needs to be done at the holding company level," he said.

Eugene A. Ludwig, the founder and chief executive of Promontory Financial Group and another former comptroller, said one regulator for both the holding company and its subsidiary would have helped prevent the crisis.

"The absence of end-to-end supervision is a real shortcoming in our current system," he said. "You just can't do an adequate job by only regulating functionally. You need a clear line of sight through all the facets of the banking organization."

The function of the holding company has evolved over time. Banks have typically used holding companies to conduct activities that were prohibited within the bank or to manage other activities and risks outside the bank. Though former Fed Chairman Alan Greenspan has argued that conducting activities at the holding company level is a way to inoculate subsidiary banks from risk, most observers now question that premise, given the financial crisis. "I don't think the holding company has turned out to be a risk mitigator. History tells us otherwise," said Ludwig. "The notion that you could insulate the bank by putting the risky activities under the holding company has proved wrong. The way the market evaluates companies is based on the entire organization. Off-balance-sheet risks have landed on the balance sheet."

Isaac agreed. "When I was at the FDIC, we frankly preferred that new activities be undertaken in the bank because any new activity that is authorized has potential benefits and risks," he said. "If you conduct activity outside the banks, in the holding company, the profits don't inure to the benefit of the bank."

He questions whether holding companies remain necessary.

"Holding companies were formed in the beginning to get around laws," he said. "The first use of the holding company was to get around the constraints on geographic expansion and then they were used to get around the very tight restrictions on the activities permitted in banks."

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