Financial Services:

Information on Nonbank Banks

GGD-86-46FS: Published: Mar 21, 1986. Publicly Released: Mar 21, 1986.

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GAO prepared a fact sheet on the nonbank bank, a form of limited purpose bank, showing its history and providing information on applicants for federal nonbank bank charters.

Nonbank banks fall outside the narrow definition of banks found in the Bank Holding Company Act because they do not offer both demand deposits and commercial loans. The Federal Reserve Board of Governors tried to bring them under its regulatory control by broadly defining demand deposits and commercial loans. However, the Supreme Court, in two recent decisions, removed some of the major obstacles to the chartering of nonbank banks and ruled that the Board had exceeded its authority. GAO found that bank holding companies establish nonbank banks to: (1) expand banking into other geographic markets; (2) establish a physical presence in anticipation of full or limited interstate banking; (3) accept deposits to fund new as well as existing activities; (4) expand their ability to compete in the middle market loan business; (5) improve the image with the consumer; (6) create new products; (6) obtain access to the Federal Reserve's system of clearing checks for payment; (7) match the actions of competitors; (8) attract a larger proportion of existing customer business; and (9) establish additional locations in unit banking states. GAO also found that: (1) the proposed nonbank banks that it studied would offer many products and services similar to full service commercial banks and that only a few would be extremely limited; (2) many holding companies believe that Board actions regarding recently approved applications are too restrictive; and (3) the Board is reconsidering the necessity of these restrictions.

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