In the wake of the Gramm-Leach-Bliley Act of 1999, the structural options available for engaging in banking and other financial activities have expanded.

The act permits qualifying companies that own a bank - "financial holding companies" - to also own companies that engage in securities underwriting and dealing, insurance agency and underwriting, merchant banking or venture capital activities, the distribution of mutual funds, and securities lending.

Financial holding companies may hold any type of deposit-taking subsidiary, including a national bank, a state chartered bank, or a thrift or savings bank.

For a company to qualify as a financial holding company, however, each of its deposit-taking subsidiaries must be well capitalized and well managed, and have at least a "satisfactory" rating under the Community Reinvestment Act. Financial holding companies must also satisfy capital standards imposed by the Federal Reserve Board.

Because of these constraints and other implications of bank regulation, a financial company interested in "banking" should make a careful evaluation of the strategic benefits of various structures to find the ones that best serve its business purpose.

Also, although Gramm-Leach-Bliley closed the door on a commercial company's engaging in "banking" as a unitary thrift holding company, commercial enterprises can still engage in bank-like activities through some other structural options.

National bank. A national bank chartered by the Office of the Comptroller of the Currency is authorized to engage in the business of banking and "all such incidental powers as shall be necessary to carry on the business of banking." The evolving "business of banking" standard is unimpaired by Gramm-Leach-Bliley, so the OCC may continue to expand the activities permitted for national banks and their operating subsidiaries.

In addition, Gramm-Leach-Bliley creates a new category of subsidiaries of banks. "Financial subsidiaries" may engage in all activities determined to be "financial" by the Treasury Department. Expressly excluded are insurance underwriting, real estate development, and merchant banking activities.

Gramm-Leach-Bliley requires a national bank to:

  • Deduct investments in financial subsidiaries from the bank's capital when computing capital ratios.
  • Limit the total amount of investments in such subsidiaries.
  • Limit dealings between the bank and its financial subsidiaries.

In addition, the bank must be well capitalized, well managed, and have at least a "satisfactory" rating under the Community Reinvestment Act. Operating subsidiaries do not have these constraints.State-chartered bank. Most states have "wild card" statutes that permit banks chartered in that state to engage in all activities permissible for national banks. State banks could engage in principal activities broader than those of national banks, however, only to the extent permitted by the Federal Deposit Insurance Corp. under section 24 of the Federal Deposit Insurance Act.

Gramm-Leach-Bliley does not impair the flexibility of the states to define the scope of permissible activities for state banks and their subsidiaries, though it imposes certain restrictions on new "financial subsidiaries" of state member banks.

The act requires a state member bank to be well capitalized and to meet CRA requirements before setting up a "financial" subsidiary. Unlike national banks, state member banks are not required to be well managed, or to limit their investment in the subsidiary.

Gramm-Leach-Bliley preserves section 24 and allows the FDIC to impose requirements on state nonmember banks in this area. The FDIC is proposing to impose restrictions on state nonmember banks essentially identical to those Gramm-Leach-Bliley imposes on state member banks.

Savings banks or thrifts. The unitary thrift charter continues to be a "banking" option for financial companies. Through such a structure, a financial company can engage in the same range of financial activities that are permissible for a financial holding company. However, to qualify for affiliation powers a federal thrift must comply with the qualified thrift lender test, keeping 65% of its assets in qualified thrift investments such as real estate, educational or credit card loans, or mortgage-backed securities.

Gramm-Leach-Bliley does not require that a unitary thrift holding company satisfy the financial holding company conditions, nor does the OTS impose capital requirements on thrift holding companies.

A federal thrift and its holding company are both regulated by a single banking regulator and, also unlike a bank, a federal thrift that satisfies the qualified thrift lender test may branch nationwide.

Industrial loan company. Any company may own an industrial loan company chartered in certain states that authorize such entities (for example, Utah and California). Industrial loan companies typically have bank-like powers authorized by the chartering state and may offer all types of consumer and commercial loans.

To avoid its parent becoming a bank holding company, the industrial loan company can neither accept demand deposits if its assets exceed $100 million nor incur overdrafts at the Federal Reserve Banks on behalf of its affiliates.

Gramm-Leach-Bliley eases this overdraft limitation. Industrial loan companies can offer NOW and money market accounts. An industrial loan company, like a state bank, is limited in its ability to branch interstate and in the extent to which it can rely on its home state's law when serving customers in other states.

Credit card bank. Any company may own a bank that limits its activities to credit card operations and the acceptance of large-denomination time and savings deposits.

Credit card banks provide access to the federal payments system and may allow for preemption of state consumer credit laws limiting interest rates and fees.

A credit card bank may engage only in credit card operations, may not accept demand deposits, generally may not accept savings or time deposits of less than $100,000, may maintain only one office that accepts deposits, and may not engage in the business of making commercial loans.

Finance company. Any company may engage in consumer and commercial lending, leasing, and a wide variety of other non-deposit-taking banking activities without becoming a bank, becoming FDIC-insured, or becoming subject to regulation by federal banking regulators.

Depending on their activities, however, finance companies are frequently subject to state regulation and licensing, particularly if they engage in mortgage banking or retail installment sales finance. State laws often require the company to be incorporated in that state in order to provide loans to residents in that state, thus requiring a nationwide lending operation to have nearly 50 finance affiliates. Many activities of finance companies also are subject to the jurisdiction of the Federal Trade Commission.

Joint venture. Any company may participate in a joint venture with one or more banks, for example, a new entity jointly owned by the company and the bank or banks.

Historically, banking regulators required that the bank or banks be able to veto the joint venture's participation in nonbanking activities. With the passage of Gramm-Leach-Bliley, a joint venture should be permitted to engage in the newly authorized financial activities.

Yet to be resolved is whether bank investment in a joint venture will continue to be limited to a specific percentage of the bank's capital.

Minority investment in a bank. A company may make a minority investment in a bank or bank holding company, but restrictions will often be imposed to ensure that the company does not "control" the banking organization.

A purchase of less than 5% of the voting stock carries a presumption of noncontrol; a purchase up to 10% does not require prior regulatory approval but may result in restrictions later to prevent control.

A purchase of 10% to 25% requires a bank regulatory filing with approval probably subject to such restrictions, including prohibitions on intercompany transactions.

Marketing arrangements. Various marketing arrangements, including the sale of securities and insurance on bank premises, supermarket branches, and credit card cobrands, have been permitted by federal and state regulations for some time. Mr. Scott, Mr. Glancz, and Mr. Beaty are partners in the financial services group of the Venable Law Firm in Washington.

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