The bank holding company structure might soon join the list of threatened species.
The Comptroller of the Currency's new operating subsidiary rule opens the door to universal banking, possibly foreshadowing the demise of the sturdy old holding company structure.
The rule, which takes effect Dec. 31, establishes the framework banks may use to create operating subsidiaries that could directly underwrite securities, underwrite and sell insurance, provide data processing services, or offer just about any other financial product.
It is the first of two major enhancements to the national bank charter. The other, interstate branching, takes effect June 1.
"The op sub regulation holds the potential to make the holding company obsolete," said Bert Ely, president of the industry consulting firm Ely & Co. "Most bankers don't like the holding company structure and they want to get rid of it."
"This, combined with interstate branching, would make it possible for a banking organization to eliminate the holding company structure and to function on a streamlined basis," said Melanie Fein, a partner at the Washington law firm of Arnold & Porter. "I would not be surprised if some banking organizations conclude that they could save a lot of regulatory costs by doing this."
Not that the holding company will disappear without a fight.
The Federal Reserve Board is expected to push hard to preserve holding companies, which it regulates. Fed officials said the universal bank model puts the deposit insurance funds at risk because the parent bank may be forced to absorb a subsidiary's losses. That could lead to failures.
Also, Fed officials said the universal bank model allows commercial banks to invest cheap, insured deposits in their subsidiaries, an advantage insurance and securities firms do not enjoy.
"All the money you use to invest in a subsidiary is subsidized money," a Fed official said. "That gives you an advantage over people without the safety net."
The Fed also has revamped several rules in the last few months to make holding companies less clunky. Gone are firewalls preventing bank personnel from working for or selling a securities underwriting unit's products. Soon, revenue limits on these subsidiaries will be more than doubled. Finally, the Fed plans to make it easier for holding companies to enter new businesses.
"The Fed is liberalizing," said Karen Shaw Petrou, president of the industry consulting firm ISD/Shaw Inc. "There isn't an incentive for a national bank to be the first on its block to move its Section 20 to an operating subsidiary."
Industry officials said the holding company structure also contains several advantages that bankers may not want to give up. First, it allows for functional regulation. This means a state insurance commissioner or the Securities & Exchange Commission only has to review a single subsidiary, rather than the entire bank. Some federal and state tax codes also favor holding companies.
These advantages, however, may not last long. Operating a universal bank cuts compliance costs because institutions no longer have to deal with two regulators. Also, institutions may eliminate duplicative bureaucracies that exist at the bank and holding company levels.
"I don't see a great deal of benefit or need for a holding company structure," said Peter C. Davis, a partner at Booz-Allen and Hamilton in New York. "From a competitive standpoint, it doesn't really make much sense."