On his final day at the Office of the Comptroller of the Currency, Keith Noreika took one last shot at well-entrenched U.S. banking regulations.

A vocal champion of deregulation, Noreika argued that a 61-year-old federal law that encourages the formation of bank holding companies should be scaled back.

“Our country is unusual among modern nations to invoke the concept of bank holding companies,” he said during a speech in Washington. “Canada, Germany, France, Switzerland all have robust, competitive banks without holding companies.”

During Noreika’s six-month tenure as acting comptroller, one of the longstanding regulatory policies he questioned was the separation of banking from other commercial activities. The history of bank holding companies is intertwined with efforts to keep banking separate from commerce, and Noreika said Tuesday that bank holding companies may now be obsolete.

Keith Noreika, acting Comptroller of the Currency
“Bank holding companies may continue to serve a useful purpose for large, complex companies...but they may provide less value to simpler, more traditional banking firms,” departing OCC head Keith Noreika said Tuesday. Bloomberg News

“What remains is the cost of duplicative regulation and burden that restrict economic potential,” he said during remarks at the American Enterprise Institute, a conservative think tank.

Noreika, a corporate lawyer who has represented some of the nation’s largest banks, plans to return to the private sector following the swearing-in Monday of his successor, Joseph Otting.

Still, his remarks are notable as an indicator of the deregulatory winds blowing through Washington. They come at a time when some midsize banking firms — even in the absence of regulatory changes — have begun asking whether it makes sense to continue operating holding companies that own their subsidiary banks.

The costs of operating a bank holding company can be significant, and the ownership structure offers fewer benefits than it once did. The Bank Holding Company Act of 1956 encourages the use of holding companies, but does not require it.

Last week, Zions Bancorp. in Salt Lake City announced plans to merge its holding company into its bank subsidiary. Earlier this year, Bank of the Ozarks in Little Rock, Ark., and Bancorp South in Tupelo, Miss., decided to scrap their holding companies.

“This is a way for banks potentially to grant themselves some regulatory relief,” Noreika said.

“Bank holding companies may continue to serve a useful purpose for large, complex companies, especially those seeking to engage in activities abroad, but they may provide less value to simpler, more traditional banking firms,” he argued.

Holding companies are meant to serve as a source of financial strength for their banking subsidiaries. If a bank gets into financial trouble, their regulators can force them to send capital downstream. But in making the case that holding companies may have outlived their usefulness, Noreika pointed out that the Dodd-Frank Act and the Basel capital regime have reduced the ability of bank holding companies to send capital down to their banking subsidiaries.

Critics of the Bank Holding Company Act also argue that it protects existing banks from new competitors. The Eisenhower-era law bars bank holding companies from engaging in commercial activities — a sticking point for retailers that might like to expand into banking.

They maintain, too, that the Bank Holding Company Act serves to entrench the power of the Federal Reserve Board, which regulates bank holding companies.

In September, the payments firm Square applied to open an industrial bank, a path that would avoid Fed regulation under the Bank Holding Company Act. But no new industrial banks have been chartered since the financial crisis, and it is unclear whether Square will succeed in ending the drought.

During his remarks Tuesday, Noreika did not call for a full repeal of the Bank Holding Company Act. But he did suggest several changes that would make the law less onerous for banks.

For example, he said that Congress could amend the law so that if the depository institution held a substantial portion of the holding company’s assets, the depository institution’s regulator would have sole examination and enforcement authority.

It is unclear whether the U.S. banking industry would support a repeal of the decades-old Bank Holding Company Act.

“I don’t know the answer to that question yet,” Wayne Abernathy, executive vice president at the American Bankers Association, said during a panel discussion that followed Noreika’s speech.

“This is a time of transition, where questions that hadn’t been asked really need to be considered and evaluated.”

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