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United States Government Accountability Office:
GAO: 

Report to Congressional Committees: 

January 2012: 

Bank Holding Company Act: 

Characteristics and Regulation of Exempt Institutions and the 
Implications of Removing the Exemptions: 

GAO-12-160: 

GAO Highlights: 

Highlights of GAO-12-160, a report to congressional committees. 

Why GAO Did This Study: 

The Bank Holding Company Act of 1956 (BHC Act) establishes the legal 
framework under which bank holding companies-—that is, companies which 
own or control banks-—operate and restricts the type of activities 
that these companies may conduct. The BHC Act excludes from these 
restrictions certain companies because the financial institutions they 
own are exempt from the BHC Act definition of “bank”. However, these 
exempt institutions are eligible for FDIC insurance raising questions 
about continuing to exempt their holding companies from BHC Act 
requirements. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act directs 
GAO to study the implications of removing the exemptions. This report 
examines (1) the number and general characteristics of certain 
institutions in the U.S. banking system that are exempt from the 
definition of bank in the BHC Act, (2) the federal regulatory system 
for exempt financial institutions, and (3) potential implications of 
subjecting the holding companies of exempt institutions to BHC Act 
requirements. GAO analyzed data and exams from exempt institutions and 
regulators, and examined regulators’ guidance and policies. GAO also 
interviewed regulators and officials from 31 exempt financial 
institutions. 

We provided a draft of this report to the relevant agencies. Treasury 
provided written comments and we received technical comments from 
other agencies which we incorporated as appropriate. 

What GAO Found: 

The 1,002 exempt financial institutions make up a small percentage of 
the assets of the overall banking system-—about 7 percent-—and include 
industrial loan corporations (ILC), limited-purpose credit card banks, 
municipal deposit banks, trust banks with insured deposits, and 
savings and loans (S&L). Although exempt from the BHC Act, S&L holding 
companies are regulated by the Federal Reserve System Board of 
Governors (Federal Reserve) under the Home Owners’ Loan Act as 
amended. Excluding S&Ls, the number of exempt institutions drops to 57 
that comprise less than 1 percent of banking system assets and there 
is a 3-year moratorium on the approval of federal deposit insurance on 
select exempt institutions that ends in 2013. These institutions vary 
by size, activities, and risks. Larger institutions such as ILCs 
provide banking services similar to those of commercial banks and 
carry many of the same risks. Other exempt institutions are smaller, 
provide only a few services such as credit card loans and related 
services, and thus have lower risk profiles. 

Federal regulation of the holding companies of exempt institutions and 
their affiliates varies. The Federal Deposit Insurance Corporation 
(FDIC) and Office of the Comptroller of the Currency (OCC) oversee 
ILCs, credit card banks, and trust banks, and focus their supervision 
on the institutions, not the parent holding companies. They examine 
the institutions for safety and soundness and for potential conflicts 
of interest in transactions with affiliates and the holding company. 
In contrast, the Federal Reserve oversees bank and, more recently, S&L 
holding companies using consolidated supervision that allows examiners 
to look at all entities and affiliates in the structure. OCC officials 
and representatives of exempt institutions viewed the current 
oversight was sufficiently robust. FDIC officials indicated that 
supervision of the exempt institutions themselves was adequate, but 
noted that consolidated supervision authorities provide important 
safety and soundness safeguards. Officials from the Federal Reserve 
and Department of the Treasury (Treasury) stated that the exemptions 
should be removed, given that exempt institutions have access to FDIC 
insurance and the holding companies of most types of exempt 
institutions are not subject to consolidated supervision. 

The implications of subjecting exempt institutions and their holding 
companies to the BHC Act vary. While many officials from the exempt 
institutions owned by commercial holding companies said that the 
institutions would be divested, data suggest that removing the 
exemptions would likely have a limited impact on the overall credit 
market given the overall market share of exempt institutions is small. 
Views varied on how removing the exemptions would improve safety and 
soundness and financial stability. Some officials from exempt 
institutions said that financial stability could be adversely affected 
by further concentrating market share. Federal Reserve officials noted 
that institutions that remain exempt are not subject to consolidated 
supervision but could grow large enough to pose significant risks to 
the financial system, an issue they plan to continue to watch. 

View [hyperlink, http://www.gao.gov/products/GAO-12-160]. For more 
information, contact A. Nicole Clowers 202-512-8678 or 
clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Exempt Financial Institutions Vary by Size, Ownership, Activities, and 
Risks: 

Federal Regulation of Exempt Institutions Differs across Regulators, 
and Views on Regulatory Adequacy Are Mixed: 

Removing BHC Act Exemptions Could Have Varying Implications: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Financial Institutions Exempt under the Bank Holding 
Company Act and the Holding Company Commercial Status: 

Appendix III: Comments from the Department of the Treasury: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Primary Federal Banking Regulators and Their Basic Functions, 
as of January 2012: 

Table 2: Certain BHC Act Exempt Institutions and Their Federal 
Regulators: 

Table 3: Commercial Status of Holding Companies Owning ILCs, Limited-
Purpose Credit Card Banks, Municipal Deposit Banks, and Trust Banks, 
as of December 31, 2011: 

Table 4: Percentage of Total Loans and Leases on the Balance Sheets of 
ILCs, Limited-Purpose Credit Card Banks, Municipal Deposit Banks, and 
Trust Banks, as of June 30, 2010: 

Table 5: HHI of Concentration among FDIC-insured Institutions in Loan 
Markets, 2010: 

Table 6: Industrial Loan Corporations, as of September 30, 2011: 

Table 7: Limited-Purpose Credit Card Banks, as of September 30, 2011: 

Table 8: Municipal Deposit Banks, as of September 30, 2011: 

Table 9: Federal Chartered Trust Banks, as of September 30, 2011: 

Figures: 

Figure 1: Geographic Distribution of ILCs, Limited-Purpose Credit Card 
Banks, Trust Banks, and Municipal Deposit Banks, as of September 30, 
2011: 

Figure 2: Average Equity-To-Total Assets Ratios for Holding Companies 
of ILCs and Limited-Purpose Credit Card Banks Compared with Those of 
Bank Holding Companies, 2006-2010: 

Abbreviations: 

BHC Act: Bank Holding Company Act of 1956: 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection 
Act: 

GLBA: Gramm-Leach-Bliley Act: 

FDI Act: Federal Deposit Insurance Act: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Federal Reserve System Board of Governors: 

FSOC: Financial Stability Oversight Council: 

HHI: Herfindahl-Hirschman Index: 

HOLA: Home Owners' Loan Act: 

ILC: industrial loan corporation: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

S&L: savings and loans: 

SEC: Securities and Exchange Commission: 

SOD: Summary of Deposits: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

January 19, 2012: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Spencer Bachus: 
Chairman: 
The Honorable Barney Frank: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

More than 7,500 banks insured by the Federal Deposit Insurance 
Corporation (FDIC) were operating in 2011, most of them owned or 
controlled by bank holding companies regulated under the Bank Holding 
Company Act of 1956 (BHC Act).[Footnote 1] The BHC Act establishes the 
legal framework under which bank holding companies operate and 
establishes their supervision, which puts bank holding companies and 
their banking and nonbanking interests under the authority of the 
Board of Governors of the Federal Reserve System (Federal Reserve). 
The BHC Act also limits the types of activities that bank holding 
companies may conduct, either directly or through nonbank 
subsidiaries. The restrictions, which are designed to maintain the 
general separation of banking and commerce in the United States, only 
allow bank holding companies to engage in banking activities; to own 
and manage banks; and to engage in those activities that the Federal 
Reserve has determined to be “closely related to banking,” such as 
extending credit and servicing loans and performing appraisals of real 
estate and tangible and intangible personal property, including 
securities. 

For various reasons, the BHC Act exempts from regulation certain 
companies that own depository institutions; these subsidiaries are not 
defined as banks for purposes of the BHC Act and thus the companies 
that own them are not considered bank holding companies and are not 
required to comply with the BHC Act’s restrictions. Only one type of 
these companies-—savings and loan holding companies—-is subject to 
regulation at the holding company level, as follows. 

* Industrial loan corporations. Industrial loan corporations (ILC) are 
limited-service financial institutions that make loans and raise funds 
by selling certificates called "investment shares" and by accepting 
deposits. ILCs are distinguished from finance companies because ILCs 
accept deposits in addition to making consumer loans. ILCs also differ 
from commercial banks because most ILCs do not offer demand deposit 
(checking) accounts.[Footnote 2] 

* Limited-purpose credit card banks. Limited-purpose credit card banks 
are generally restricted to credit card lending, can maintain only one 
office that accepts deposits, cannot accept demand deposits or 
transaction accounts, do not accept savings or time deposits of less 
than $100,000 (unless used as collateral for extensions of credit), 
and do not engage in the business of making commercial loans (other 
than small business loans). 

* Municipal deposit banks. Municipal deposit banks are state-chartered 
institutions that are wholly owned by thrift institutions or savings 
banks and restrict themselves to acceptance of deposits from thrift 
institutions or savings banks, deposits arising out of the corporate 
business of their owners, and deposits of public monies.[Footnote 3] 

* Savings and loans or thrifts. Savings and loans (S&L) or thrifts are 
institutions that traditionally accepted deposits to channel funds 
primarily into residential mortgages. More recently, these 
institutions' charters have been expanded to allow them to provide 
commercial loans and a broader range of consumer financial 
services.[Footnote 4] As discussed in detail later in this report, S&L 
holding companies are regulated by the Federal Reserve Board and are 
subject to restrictions on the activities they conduct. 

* Trust banks. Trust banks are institutions that function solely in a 
fiduciary capacity. All or substantially all of the deposits of such 
institutions must be in trust funds. Trust banks must not permit 
insured deposits to be marketed through affiliates and may not accept 
demand deposits.[Footnote 5] 

While these financial institutions are not considered banks under the 
BHC Act, each can offer deposit insurance under the Federal Deposit 
Insurance Act (FDI Act).[Footnote 6] Establishing or acquiring an 
institution that is not defined as a bank under the BHC Act is the 
only avenue for commercial companies to own depository institutions 
that are eligible for deposit insurance. However, the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act), which was 
enacted in 2010, included a 3-year moratorium on approving federal 
deposit insurance for ILCs, credit card banks, and trust banks that 
are directly or indirectly owned or controlled by a commercial firm. 
[Footnote 7] In June 2009, the Department of the Treasury (Treasury) 
submitted a financial regulatory reform plan to Congress that, among 
other things, proposed amending the BHC Act by eliminating these 
exemptions and defining these institutions as banks. Treasury proposed 
that all holding companies owning an insured depository institution be 
subject to the BHC Act restrictions and the Federal Reserve's 
supervision. 

Section 603 of the Dodd-Frank Act required us to conduct a study on 
certain institutions that are exempt from the BHC Act definition of a 
"bank." This report examines (1) the number of these institutions in 
the U.S. banking system that are exempt from the definition of bank in 
the BHC Act and their general characteristics; (2) the federal 
regulatory system for the exempt financial institutions and 
participants' views on it; and (3) the potential implications of 
subjecting the parents of the exempt institutions to the BHC Act 
provisions relating to the types of activities in which such 
institutions may engage, the availability and allocation of credit, 
the stability of the financial system and the economy, and the safe 
and sound operations of such institutions. 

To determine the number of certain types of financial institutions 
that are exempt from the definition of "bank" in the BHC Act and their 
general characteristics, we analyzed data from FDIC, the Federal 
Reserve, the Office of the Comptroller of the Currency (OCC), the 
Office of Thrift Supervision (OTS) and SNL Financial relating to the 
number of exempt institutions, their geographic location, their asset 
size, and their parent holding company.[Footnote 8] We also 
interviewed officials from the Federal Reserve, FDIC, and OCC to 
obtain their understanding of the exemptions listed in the BHC Act. To 
determine whether the exempt institutions were owned by commercial 
holding companies, we first collected information from the federal 
bank regulators on the parent companies and identified publicly 
available information on their various business activities.[Footnote 
9] We then compared the financial activities listed in Section 4(k) of 
the BHC Act to the activities of the parent holding companies to 
determine the extent to which financial activities contributed to the 
companies' 2010 annual gross revenue. In accordance with the Dodd-
Frank Act, if 15 percent or more of a company's revenue was financial, 
we classified it as noncommercial. Companies that derived less than 15 
percent of their revenue from financial activities were classified as 
commercial. We assessed the reliability of the data we obtained from 
each of the sources listed and determined that they were reliable for 
these purposes. 

To describe the federal regulatory system for the exempt financial 
institutions, we reviewed 18 examinations of exempt institutions with 
assets of $1 billion or more that FDIC and OCC conducted in 2008 
through 2011. We judgmentally selected examinations for review based 
on the institutions' asset size, choosing larger institutions because 
of the potential risks they posed. The examinations we reviewed 
included ILCs, and limited-purpose credit card banks. Our review of 
examinations did not include trust banks and municipal deposit banks 
because none had assets of more than $1 billion. We reviewed 
documentation from FDIC, OCC, and the Federal Reserve about their 
supervisory practices, including information from both the Federal 
Reserve and OCC on how they planned to carry out their new 
responsibilities for S&Ls and their holding companies.[Footnote 10] We 
interviewed officials from FDIC, the Federal Reserve, and OCC 
regarding the supervision of all BHC Act exempt institutions, as well 
as S&L and holding company supervision. 

To determine the potential effect on the credit markets of subjecting 
the parents of exempt institutions to the requirements of the BHC Act, 
we analyzed data from the exempt institutions, FDIC, the Federal 
Reserve, OCC, the Office of Thrift Supervision (OTS), the Securities 
and Exchange Commission (SEC), and SNL Financial, including 
institutions' Consolidated Reports of Condition and Income (Call 
Reports) submitted to FDIC and Thrift Financial Reports submitted to 
OTS.[Footnote 11] We estimated market shares for each type of exempt 
institution in various loan markets for 2010. We also estimated loan 
market concentration for 2010 using the Herfindahl-Hirschman Index, a 
measure that reflects both the number of firms in the market and each 
firm's market share. We assessed the reliability of the data we 
obtained from each of the sources listed above and determined that 
they were reliable for these purposes. 

To analyze other potential implications of subjecting the companies 
that own the exempt institutions to regulation under the BHC Act, we 
judgmentally selected a number of exempt institutions to interview. We 
interviewed representatives from 31 exempt institutions (ILCs, limited-
purpose credit card banks, municipal deposit banks, S&Ls, and trust 
banks) selected on the basis of size of the exempt institutions and 
the commercial status of holding company. We also interviewed 
representatives from the American Bankers Association and the 
Independent Community Bankers Association. In addition, we interviewed 
representatives from two ILC holding companies that recently became 
bank holding companies to obtain their views on bank holding company 
supervision from the perspective of a former ILC holding company. We 
also interviewed officials from the Federal Reserve, OCC, FDIC, and 
Treasury to obtain their views on removing the exemptions. See 
appendix I for more information on our scope and methodology. 

We conducted this performance audit between October 2010 and January 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

The U.S. bank regulatory structure is composed of several agencies at 
both the federal and state levels. The specific regulatory structure 
for a depository institution is determined by the type of charter the 
institution chooses. Depository institution charter types include 
commercial banks; S&Ls and savings banks; ILCs, also known as 
industrial banks; and credit unions. These charters can be obtained at 
the state and federal level, except for ILC charters, which are 
chartered only at the state level. State regulators help regulate the 
institutions they charter, but every institution that offers federal 
deposit insurance has a primary federal regulator (see table 1). 

Table 1: Primary Federal Banking Regulators and Their Basic Functions, 
as of January 2012: 

Regulator: OCC; 
Basic function: Charters and supervises national banks and federal 
S&Ls. 

Regulator: Federal Reserve; 
Basic function: Oversees state-chartered banks that opt to be members 
of the Federal Reserve System, bank holding companies, S&L holding 
companies and their nondepository institution subsidiaries, and any 
firm designated as systemically significant by the Financial Stability 
Oversight Council. 

Regulator: FDIC; 
Basic function: Oversees state-chartered banks that are not members of 
the Federal Reserve System, as well as state-chartered savings banks 
and S&Ls; insures the deposits of all banks and S&Ls that are approved 
for federal deposit insurance; and resolves all failed insured banks 
and S&Ls and certain nonbank financial companies. 

Source: GAO summary of information from OCC, the Federal Reserve, and 
FDIC. 

[End of table] 

To achieve their safety and soundness goals, bank regulators establish 
capital requirements, conduct onsite examinations and off-site 
monitoring to assess a bank's financial condition, and monitor 
compliance with banking laws. Regulators also issue regulations, take 
enforcement actions, and close banks they determine to be insolvent. 

Regulatory Framework for Holding Companies: 

The BHC Act, as amended, contains a comprehensive framework for the 
supervision of bank holding companies and their nonbank subsidiaries. 
Bank holding companies are companies that own or control a bank, as 
defined in the BHC Act. Generally, any company that acquires control 
of an insured bank or bank holding company is required to register 
with the Federal Reserve as a bank holding company. The BHC Act 
defines "control" of an insured bank to include ownership or control 
of blocks of stock, the ability to elect a majority to the board of 
directors, or other management prerogative.[Footnote 12] Regulation 
under the BHC Act entails, among other things, consolidated 
supervision of the holding company by the Federal Reserve and, as 
previously discussed, restricts the activities of the holding company 
and its affiliates to those that are closely related to banking or, 
for qualified financial holding companies, activities that are 
financial in nature. In 1999, the Gramm-Leach-Bliley Act (GLBA) 
provided that a bank holding company may elect to become a financial 
holding company that can engage in a broader range of activities that 
the Federal Reserve determines to be financial in nature or incidental 
to such financial activity.[Footnote 13] For example, financial 
holding companies can engage in securities underwriting and dealing, 
but would be prohibited, for example, from selling unrelated products. 

The Home Owners' Loan Act (HOLA), as amended sets forth the regulatory 
framework for S&L holding companies.[Footnote 14] S&Ls are often part 
of holding company structures. Like bank holding companies, S&L 
holding companies are subject to restrictions on the activities they 
conduct. HOLA permits S&L holding companies to conduct activities that 
the Federal Reserve Board has determined to be closely related to 
banking and activities permissible for financial holding companies. 
[Footnote 15] With the abolishment of OTS, the Federal Reserve is now 
the regulator for these holding companies.[Footnote 16] The Dodd-Frank 
Act made significant changes to the regulatory framework for S&L 
holding companies. The Dodd-Frank Act amends HOLA and the BHC Act to 
create similar requirements for both bank holding companies and S&L 
holding companies. For example, the Dodd-Frank Act amended both the 
BHC Act and HOLA to provide that the Federal Reserve Board has 
authority to impose capital requirements on depository institution 
holding companies by regulation or order, including bank holding 
companies and S&L holding companies. 

Before GLBA, commercial companies could own a single S&L without 
becoming subject to the activities restrictions that apply to S&L 
holding companies, and a number of commercial firms--such as General 
Electric; Macy's, Inc.; and Nordstrom, Inc.--acquired S&Ls. While GLBA 
prohibited commercial activities for all S&L holding companies, it 
"grandfathered" the companies that already owned an S&L subsidiary--
that is, it allowed these companies to keep the existing S&L and 
engage in commercial activities.[Footnote 17] The Dodd-Frank Act 
generally does not restrict the activities of grandfathered unitary 
S&L holding companies, but it amends HOLA to authorize the Federal 
Reserve to determine whether to require grandfathered unitary S&L 
holding companies engaged in nonfinancial activities to form 
intermediate holding companies. A grandfathered unitary S&L holding 
company will be required to establish an intermediate holding company 
if the Federal Reserve determines that the establishment of the 
intermediate holding company is necessary to appropriately supervise 
activities determined to be financial activities or to ensure that 
supervision by the Federal Reserve does not extend to the 
grandfathered unitary S&L holding company's nonfinancial activities. 
The intermediate holding company would be subject to regulation as an 
S&L holding company and would be required to conduct all or a portion 
of the firm's financial activities. The grandfathered unitary S&L 
holding company would be required to serve as a source of strength--
that is, to provide financial assistance in the event of financial 
distress--to its subsidiary intermediate holding company. The Federal 
Reserve can also require certain reports from and undertake limited 
examinations of grandfathered unitary S&L holding companies. 

In addition, the Dodd-Frank Act requires the Federal Reserve to 
require all bank holding companies and S&L holding companies to serve 
as a source of strength to their subsidiary depository institutions. 
The Federal Reserve regulations governing S&L holding companies state 
that an S&L holding company "shall serve as a source of financial and 
managerial strength to its subsidiary savings associations." The Dodd-
Frank Act defines the term "source of strength" as the ability of a 
company that directly or indirectly owns or controls an insured 
depository institution to provide financial assistance in the event of 
financial distress of the insured institution. If an insured 
depository institution is not the subsidiary of a bank holding company 
or an S&L holding company, the appropriate federal regulator for the 
insured depository institution will require any company that directly 
or indirectly controls the insured depository institution to serve as 
a source of financial strength to the insured depository institution. 

The Dodd-Frank Act also made significant changes in the capital 
requirements applicable to certain bank holding companies and S&L 
holding companies. Depository institution holding companies will be 
subject to minimum leverage and risk-based capital requirements on a 
consolidated basis. These capital requirements must not be lower than 
the leverage and risk-based capital requirements applicable to insured 
depository institutions as in effect on July 21, 2010. In general, the 
new capital requirements will apply to S&L holding companies beginning 
July 21, 2015. 

Consolidated Supervision: 

The Federal Reserve's bank holding company supervision manual explains 
that the holding company structure can adversely affect the financial 
condition of a bank subsidiary by exposing the bank to various types 
of risk, including market, operational, and reputational risks. For 
example, a holding company or an affiliate with poor risk management 
procedures may take excessive investment risks and fail. The failure 
of a holding company or affiliate can impair an insured institution's 
access to financial markets. Moreover, a poorly managed bank holding 
company can initiate adverse intercompany transactions with the 
insured depository institution or impose excessive dividends on it. 
[Footnote 18] Adverse intercompany transactions may include charging 
the insured depository institution above-market prices for products or 
services, such as information technology services, provided by an 
affiliate or requiring the insured institution to purchase poor 
quality loans at inflated prices from an affiliate, thus placing the 
insured institution at greater risk of loss. Market risk is the risk 
to a banking organization's financial condition resulting from adverse 
movements in market prices due to such factors as changing interest 
rates. Operational risk is the potential that inadequate information 
systems, operations problems, breaches in internal controls, or fraud 
will result in unexpected losses. From a practical standpoint, insured 
depository institutions may be susceptible to operational risk when 
they are dependent on or share in the products or services of a 
holding company or its subsidiaries, such as information technology 
services or credit card account servicing. If these entities ceased 
their operations, the insured institution could be adversely impacted. 
Reputational risk is the potential that negative publicity regarding 
an institution's or affiliate's business practices, whether true or 
not, could cause a decline in the customer base, costly litigation, or 
revenue reductions. Operational or reputational risk that impacts the 
holding company can also affect affiliates throughout the corporate 
structure. 

The BHC Act has established a consolidated supervisory framework for 
assessing the risks to a depository institution that could arise 
because of its affiliation with other entities in a holding company 
structure. Consolidated supervision of a bank holding company includes 
the parent company and its subsidiaries and allows the regulator to 
understand the organization's structure, activities, resources, and 
risks and to address financial, managerial, operational, or other 
deficiencies before they pose a danger to the bank holding company's 
subsidiary depository institutions. According to Federal Reserve Board 
Supervisory Letter SR 08-9, the agency has established capital 
standards for bank holding companies, helping to ensure that they 
maintain adequate capital to support groupwide activities, do not 
become excessively leveraged, and are able to serve as a source of 
strength to their depository institution subsidiaries. The Federal 
Reserve may generally examine holding companies and their nonbank 
subsidiaries, subject to some limitations, to assess the nature of the 
operations and financial condition of the holding company and its 
subsidiaries, the financial and operational risks within the holding 
company that may pose a threat to the safety and soundness of any 
depository institution subsidiary, and the systems for monitoring and 
controlling such risks, among other things. 

As the new regulator for S&L holding companies, the Federal Reserve 
has indicated that it intends, to the greatest extent possible taking 
into account any unique characteristics of S&L holding companies and 
the requirements of HOLA, to assess the condition, performance, and 
activities of S&L holding companies on a consolidated basis in a 
manner that is consistent with the Board's established risk-based 
approach regarding bank holding company supervision. 

In contrast, FDIC and OCC do not have consolidated supervisory 
authority over the holding companies for the exempt banking 
institutions but do have full authority to apply to them the same 
federal regulatory safeguards that apply to all insured banks and 
S&Ls. For example, FDIC and OCC can impose conditions and examine 
agreements, dependencies, and transactions between exempted depository 
institutions and their holding companies (including affiliated 
entities) in order to better ensure the safety and soundness of those 
institutions. Furthermore, FDIC can terminate an exempted entity's 
deposit insurance, enter into agreements during the acquisition of an 
insured entity, and take enforcement measures. In addition, FDIC 
possesses authority under Section 10 of the FDI Act to examine the 
affairs of any affiliate of any depository institution as may be 
necessary to disclose fully (1) the relationship between such 
depository institution and any such affiliate and (2) the effect of 
such relationship on the depository institution. 

BHC Act Exemptions: 

Section 2 of the BHC Act exempts companies owning certain types of 
financial institutions from regulation under the BHC Act because the 
institutions they own are not defined as "banks" in the BHC Act. 
Companies owning these institutions are not considered bank holding 
companies; are not required to comply with the BHC Act's restrictions 
on activities; and with one exception, they are not subject to the 
Federal Reserve's oversight. The statutory exemptions from the 
definition of "bank" were established by the Competitive Equality 
Banking Act of 1987 (CEBA), which also expanded the definition of 
"bank" in the BHC Act to include all FDIC-insured institutions. 
[Footnote 19] The CEBA exemptions include ILCs, limited purpose credit 
card banks, trust banks and S&Ls.[Footnote 20] One type of exempt 
institution, ILCs, began in the early 1900s as small, state-chartered 
loan companies that served the borrowing needs of industrial workers 
who were unable to obtain noncollateralized loans from commercial 
banks. The ILC industry experienced significant asset growth in the 
2000s, and ILCs evolved from small, limited-purpose institutions to a 
diverse group of insured financial institutions with a variety of 
business models. S&Ls are exempt institutions but S&L holding 
companies were subject to holding company supervision by OTS and now 
the Federal Reserve. In addition, S&L holding companies are subject to 
restrictions on activities set out in HOLA. We also considered one 
type of institution that was exempted by the Bank Holding Company Act 
Amendments of 1970, municipal deposit banks.[Footnote 21] 

Table 2 identifies the federal regulators for the certain types of 
exempt institutions. 

Table 2: Certain BHC Act Exempt Institutions and Their Federal 
Regulators: 

Exempt Institution: ILC; 
Federal regulator: 
* FDIC. 

Exempt Institution: Limited-purpose credit card bank; 
Federal regulator: 
* Federally chartered: OCC; 
* State chartered: FDIC. 

Exempt Institution: Municipal deposit bank; 
Federal regulator: 
* FDIC. 

Exempt Institution: Trust bank; 
Federal regulator: 
* Federally chartered: OCC; 
* State chartered: FDIC. 

Exempt Institution: S&L; 
Federal regulator: 
* S&L holding companies: Federal Reserve; 
* Federally chartered S&Ls: OCC; 
* State chartered S&Ls: FDIC. 

Sources: GAO summary of information from FDIC, the Federal Reserve, 
and OCC. 

[End of table] 

Exempt Financial Institutions Vary by Size, Ownership, Activities, and 
Risks: 

Financial institutions that are exempt from the BHC Act definition of 
bank make up a small percentage of the overall banking system--1,002 
institutions (about 7 percent)--and include ILCs, limited-purpose 
credit card banks, municipal deposit banks, trust banks with insured 
deposits, and S&Ls. If S&Ls, which are different from the other types 
of exempt institutions in that they are regulated by the Federal 
Reserve at the holding company level, are excluded, the percentage 
drops to less than 1 percent, or 57 institutions. Determining whether 
the holding companies that own exempt institutions are commercial is 
difficult, given the lack of a standard definition and limited 
publicly available data on exempt institutions. The risk profiles for 
exempt institutions vary, reflecting differences in the institutions' 
size, complexity, and level of banking and nonbanking activities. 

Exempt Institutions Make Up about 7 Percent of the U.S. Banking System: 

The assets of institutions exempt from the definition of bank in the 
BHC Act that we reviewed account for about 7 percent of the total 
assets in the U.S. banking system.[Footnote 22] S&Ls account for 
almost 7 percent of all FDIC-insured institutions, as of June 30, 
2011. The 57 institutions among the other types of exempt institutions 
as of 2011 held less than 1 percent in the assets of FDIC-insured 
banks.[Footnote 23] The 57 non-S&L exempt institutions were ILCs (34), 
limited-purpose credit card banks (10), trust banks (3), and municipal 
deposit banks (10). These exempt institutions were generally small in 
terms of assets. For example, only 8 of the 57 exempt institutions had 
assets of more than $5 billion, and more than half of them had assets 
of less than $500 million. Appendix II contains additional information 
on these 57 exempt institutions, including their federal regulators 
and asset sizes. 

Aside from S&Ls, the largest category of exempt institutions is ILCs, 
which have been declining in number and size in recent years. Since 
2006, the number of ILCs has declined from 58 to 34, and the assets of 
these institutions have dropped from $212.7 billion to $102.4 billion. 
Federal regulators and industry representatives attributed these 
declines to several factors, but most frequently to the federal 
moratoriums on deposit insurance for new ILCs. In particular, FDIC 
imposed a moratorium on deposit insurance for new ILCs in 2006, and no 
ILCs have been approved since then.[Footnote 24] Also, during the 2007-
2009 financial crisis, a number of the larger ILC holding companies 
applied and were approved to become bank holding companies, including 
American Express Company; Goldman Sachs Group, Inc.; Morgan Stanley; 
and GMAC Financial Services. Merrill Lynch & Co. also owned an ILC 
that became part of the Bank of America Corporation, a bank holding 
company, when it acquired Merrill Lynch in 2008. Subsequent to the 
FDIC moratoriums, the Dodd-Frank Act placed a 3-year moratorium on 
FDIC approval of deposit insurance applications received after 
November 23, 2009, for ILCs, credit card banks, and trust banks that 
were directly or indirectly owned or controlled by a commercial firm. 
In addition, the Dodd-Frank Act provides that until July 21, 2013, 
FDIC may not approve any change in control of an ILC, trust bank, or 
credit card bank that would place the institution under the control of 
a commercial firm. 

The combined assets of limited-purpose credit card banks, trust banks, 
and municipal deposit banks totaled $10.3 billion as of June 30, 2011. 
The assets of the 10 limited-purpose credit card banks, which issue 
only credit cards, totaled $8.5 billion, and the assets of these 
limited-purpose credit card banks ranged from $3 million to $4.7 
billion.[Footnote 25] Many limited-purpose credit card banks sell 
their credit receivables to the parent company, so their assets are 
typically small. Four limited-purpose credit card banks issue what are 
called private-label cards, while three issue general-purpose credit 
cards and two offer both types.[Footnote 26] The 10 municipal deposit 
banks' assets totaled $1.5 billion, and the three trust banks' assets 
totaled about $318 million, as of June 2011. 

As shown in figure 1, ILCs, limited-purpose credit card banks, 
municipal deposit banks, and trust banks are geographically 
concentrated. For example, limited-purpose credit card banks are 
located in 10 states. ILCs are located in five states--California, 
Hawaii, Nevada, Minnesota, and Utah. All 10 municipal deposit banks 
are located in New York, and the 3 trust banks are located in Georgia, 
Maryland, and Massachusetts.[Footnote 27] In contrast, as of June 30, 
2011, 945 S&Ls (including both federally and state-chartered S&Ls) 
were in operation and of these approximately 426 are owned by S&L 
holding companies, concentrated primarily in New England, the 
Northeast, and the Midwest as of June 30, 2011. 

Figure 1: Geographic Distribution of ILCs, Limited-Purpose Credit Card 
Banks, Trust Banks, and Municipal Deposit Banks, as of September 30, 
2011: 

[Refer to PDF for image: illustrated U.S. map] 

Industrial loan companies: 
Number of institutions: 34; 
Location: California, Minnesota, Nevada, Utah; 
Assets: $102.4 billion. 

Credit card banks: 
Number of institutions: 10; 
Location: Delaware, Florida, Iowa, Nebraska, Nevada, New Mexico, North 
Carolina, Ohio, Rhode Island, South Dakota; 
Assets: $8.46 billion. 

Trust banks with FDIC insurance: 
Number of institutions: 3; 
Location: Georgia, Maryland, Massachusetts; 
Assets: $0.32 billion. 

New York state municipal banks: 
Number of institutions: 10; 
Location: New York; 
Assets: $1.52 billion. 

More than 10 exempt institutions: 
Utah. 

6 to 10 exempt institutions: 
California; 
New York. 

5 exempt institutions: 
Nevada. 

1 exempt institution: 
Florida; 
Georgia; 
Hawaii; 
Iowa; 
Maryland; 
Massachusetts; 
Nebraska; 
New Mexico; 
North Carolina; 
Ohio; 
Rhode Island; 
South Dakota. 
   
0 exempt institutions: 
Alabama; 
Alaska; 
Arizona; 
Arkansas; 
Colorado; 
Connecticut; 
District of Columbia; 
Idaho; 
Illinois; 
Indiana; 
Kansas; 
Kentucky; 
Louisiana; 
Maine; 
Michigan; 
Mississippi; 
Missouri; 
Montana; 
New Hampshire; 
New Jersey; 
New Mexico; 
North Dakota; 
Oklahoma; 
Oregon; 
Pennsylvania; 
South Carolina; 
Tennessee; 
Texas; 
Utah; 
Vermont; 
Virginia; 
Washington; 
West Virginia; 
Wisconsin; 
Wyoming. 
      
Source: FDIC, OCC, and the New York State Department of Financial 
Services (data); MapInfo (map).       

[End of figure] 

Ownership Type of the Holding Companies That Own Exempt Financial 
Institutions Is Often Not Clear: 

Determining whether holding companies that own ILCs, limited-purpose 
credit card banks, municipal deposit banks, and trust banks are 
commercial or noncommercial is challenging, for several reasons. For 
example, the lack of publicly available data on the holding companies' 
revenue sources complicates efforts to determine the ownership type. 
Some holding companies that own exempt institutions are not public 
companies and thus are not required to submit filings that contain 
such information that would be publicly available. In addition, 
regulators do not make the distinction between commercial and 
noncommercial ownership. FDIC officials told us that they focused on 
the activities and risks of the exempt institutions and their holding 
companies regardless of type. The Dodd-Frank Act sets forth a 
definition of "commercial": companies are considered commercial if 
revenue from financial activities (as defined under Section 4(k) of 
the BHC Act) generates less than 15 percent of their annual gross 
revenue.[Footnote 28] Using this definition, a number of companies 
that are generally considered commercial would be considered 
noncommercial because their revenue from financial activities is 15 
percent or more. For example, using this definition, the General 
Electric Company is classified as noncommercial because its financial 
services business segment accounted for more than 31 percent of its 
2010 annual gross revenue. 

Working within these challenges and limitations, we were able to 
determine the status of the holding companies for 43 of the 57 ILCs, 
limited-purpose credit card banks, municipal deposit banks, and trust 
banks. Using the definition of commercial from the Dodd-Frank Act and 
publicly available financial data, we determined that 11 exempt 
institutions were owned by commercial companies and 32 by 
noncommercial companies (see table 3). The status of the holding 
companies of the remaining 14 institutions could not be determined 
because of the lack of sufficiently detailed, publicly available 
financial data about the companies or information from OCC or FDIC. 
[Footnote 29] 

Table 3: Commercial Status of Holding Companies Owning ILCs, Limited-
Purpose Credit Card Banks, Municipal Deposit Banks, and Trust Banks, 
as of December 31, 2010: 

Type of exempt institutions: ILCs; 
Owned by noncommercial companies[A]: 19; 
Owned by commercial companies: 5; 
Ownership undetermined: 10. 

Type of exempt institutions: Limited-purpose credit card banks; 
Owned by noncommercial companies[A]: 1; 
Owned by commercial companies: 6; 
Ownership undetermined: 3. 

Type of exempt institutions: Municipal deposit banks; 
Owned by noncommercial companies[A]: 10; 
Owned by commercial companies: 0; 
Ownership undetermined: 0. 

Type of exempt institutions: Trust banks; 
Owned by noncommercial companies[A]: 2; 
Owned by commercial companies: 0; 
Ownership undetermined: 1. 

Type of exempt institutions: Total; 
Owned by noncommercial companies[A]: 32; 
Owned by commercial companies: 11; 
Ownership undetermined: 14. 

Sources: GAO analysis based on 2010 SEC filings, company 2010 annual 
reports, and OTS data. 

[A] Noncommercial holding companies are generally financial in nature. 

[End of table] 

According to information from OCC, one trust bank owned an affiliate 
as of May 7, 2011. However, under the Dodd-Frank Act definition of 
commercial, the affiliate is non-commercial. 

Exempt Institutions' Risk Profiles Vary: 

The risk profiles for exempt institutions vary, reflecting differences 
in the institutions' size, complexity, and level of banking and 
nonbanking activities. While few of the exempt institutions are large 
depository institutions that pose significant systemic risk to the 
financial system, many engage in several types of banking and 
nonbanking activities that carry a variety of risks. These risks exist 
at the depository institution and holding company levels. 

* ILCs. The Federal Reserve and Treasury view these institutions as 
full-service commercial banks and therefore view the risks they pose 
as similar to those of commercial banks, including credit risk. The 
FDIC concurs in this view and noted that many exempt institutions 
primarily accept brokered deposits, considered to be riskier than 
demand deposits because of concerns about liquidity risks.[Footnote 
30] ILCs can provide a wide range of banking services and are able to 
make loans (including credit card loans) and investments, like 
commercial banks. 

* Limited-purpose credit card banks. These exempt institutions are 
generally restricted to credit card lending activities and are not 
permitted to conduct many banking activities, such as mortgage or 
commercial lending.[Footnote 31] They are not permitted to accept 
demand deposits. The most dominant risks for these banks are 
compliance, liquidity, reputational, and to some extent credit risk. 

* Municipal deposit banks and trust banks. These exempt institutions' 
banking activities are limited. The sole purpose of municipal deposit 
banks is to accept municipal deposits, and these banks do not make 
commercial or consumer loans. Similarly, the three trust banks that 
are exempt from the BHC Act function only in a fiduciary capacity and 
do not pose the same types of financial risks as commercial banks. 
Their risk profile is based on fiduciary responsibility and litigation 
risk. 

* S&Ls. These exempt institutions offer a range of banking services 
that are similar to those provided by commercial banks, including 
offering a variety of banking products, accepting demand deposits and 
making commercial, real estate, and residential mortgage loans. 
Because S&Ls are similar to commercial banks, they are exposed to 
credit, liquidity, operational, reputational, and compliance risks. 
However, as discussed, unlike the owners of other exempt institutions, 
S&L holding companies are subject to supervision and regulation at the 
holding company level, by the Federal Reserve. 

In addition to their banking activities, commercial ownership of 
exempt institutions could pose additional risks. Federal Reserve, FDIC 
and Treasury officials each acknowledged the risk that a commercial 
holding company may seek to operate an exempt financial institution 
for the holding company's own benefit. For example, ILCs and limited-
purpose credit card banks could be directed to engage in transactions 
that benefited the holding company's affiliates but were detrimental 
to the financial institutions' safety and soundness. To address 
adverse transactions between an insured institution and its 
affiliates, Congress restricted the ability of insured depository 
institutions, including exempt institutions, to enter into 
transactions with affiliates.[Footnote 32] Insured institutions are 
subject to both qualitative and quantitative limits on transactions 
with affiliates. For example, a bank may not engage in a transaction 
with an affiliate if the aggregate amount of the bank's covered 
transactions with all affiliates would exceed 20 percent of the bank's 
capital stock and surplus.[Footnote 33] In addition, an institution 
generally cannot purchase low-quality assets from an affiliate. 
Congress established collateral requirements for credit transactions 
provided to an affiliate, generally requiring that a credit 
transaction be secured by collateral having market value of at least 
100 percent of the transaction. All covered transactions between 
depository institutions and their affiliates must be on terms and 
conditions that are consistent with safe and sound banking practices. 
[Footnote 34] Additionally, covered transactions between institutions 
and their affiliates must occur on market terms, which must be at 
least as favorable to the institution as those prevailing at the time 
for comparable transactions with unaffiliated companies.[Footnote 35] 

While the regulators view the commercial ownership of exempt 
institutions as posing potential risks to the financial institution, 
representatives from exempt institutions countered that such ownership 
could be a source of strength. In particular, representatives of the 
14 ILCs and 3 limited-purpose credit card banks we interviewed said 
that their holding companies currently could serve as a source of 
strength to their depository institutions. To assess whether these 
holding companies could be a source of strength to the financial 
institution, we analyzed the capitalization of holding companies for 
ILCs and credit card banks.[Footnote 36] On average, the holding 
companies of ILCs and credit card banks we analyzed had higher ratios 
of equity-to-total assets over the 5-year period than bank holding 
companies (see figure 2). The higher ratio shows that these holding 
companies had a higher, stronger cushion against losses that might 
occur. The average equity-to-total assets ratios for limited-purpose 
credit card banks remained above 20 percent over the period. In 
comparison, the average equity-to-total assets ratio of bank holding 
companies with total assets of more than $500 million that were 
required to file financial data with the Federal Reserve remained 
below 10 percent during the same period. 

Figure 2: Average Equity-To-Total Assets Ratios for Holding Companies 
of ILCs and Limited-Purpose Credit Card Banks Compared with Those of 
Bank Holding Companies, 2006-2010: 

[Refer to PDF for image: multiple line graph] 

Percentage (equity/assets): 

Year: 2006; 
Credit Card Banks: 44%; 
ILCs: 29%; 
Bank holding company industry: 9.1%. 

Year: 2007; 
Credit Card Banks: 37.4%; 
ILCs: 26.8%; 
Bank holding company industry: 9.3%. 

Year: 2008; 
Credit Card Banks: 29.3%; 
ILCs: 25.2%; 
Bank holding company industry: 8.9%. 

Year: 2009; 
Credit Card Banks: 29%; 
ILCs: 26.9%; 
Bank holding company industry: 8.9%. 

Year: 2010; 
Credit Card Banks: 32.8%; 
ILCs: 27.3%; 
Bank holding company industry: 9.2%. 

Source: GAO analysis of SEC filings. 

Note: We examined the equity positions of the ILCs and the limited-
purpose credit card banks because they were more likely to be owned by 
commercial firms compared to the other exempt institutions. We 
analyzed the equity-to-total ratios assets for 44 institutions. 

[End of figure] 

Federal Reserve acknowledged that commercial holding companies may be 
able to act as a source of strength for exempt institutions. However, 
they expressed three concerns. First, Federal Reserve officials noted 
that no federal regulator was assigned to look at the health of the 
entire holding company for an exempt institution, other than for S&Ls, 
creating a potential regulatory "blind spot." The officials explained 
that a regulator should have the authority to look at the entire 
organization and not at what affects only the depository institutions. 
Second, holding companies of ILCs are not held to the same risk 
management and capital standards as bank holding companies, according 
to the officials. For example, through consolidated supervision, the 
Federal Reserve assesses a bank holding company's risk management 
functions and its impact on the depository institution. Third, 
regulators cannot take enforcement actions to compel nonbank holding 
companies to serve as a source of strength for the exempt 
institution.[Footnote 37] Prior to the Dodd-Frank Act, FDIC and OCC 
could ask holding companies to inject capital into exempt depository 
institutions and to enter into agreements with them requiring such 
capital injections when necessary. Under the Dodd-Frank Act, as 
described earlier, if an insured depository institution is not the 
subsidiary of a bank holding company or an S&L holding company, the 
appropriate federal regulator for the insured depository institution 
will require any company that directly or indirectly controls the 
insured depository institution to serve as a source of financial 
strength for the insured depository institution. Although FDIC and OCC 
can take enforcement action against holding companies that engaged in 
unsafe and unsound practices affecting the exempt institution, they do 
not have the same authority as the Federal Reserve to set and enforce 
minimum capital levels on holding companies. 

Federal Regulation of Exempt Institutions Differs across Regulators, 
and Views on Regulatory Adequacy Are Mixed: 

Federal regulation of exempt institutions differs across the banking 
regulators and is evolving. However, views on the adequacy of the 
regulation varied with FDIC and OCC and regulated institutions viewing 
it as adequate and the Federal Reserve and Treasury viewing it as 
lacking. 

Supervision of ILCs and Limited-Purpose Credit Card Banks Focuses on 
the Institutions' Financial Condition: 

FDIC and OCC, which oversee ILCs, limited-purpose credit card banks, 
and trust banks, are focused primarily on the safety and soundness of 
the exempt institutions. To carry out its supervisory 
responsibilities, FDIC generally conducts annual full-scope 
examinations of ILCs and state-chartered limited-purpose credit card 
banks jointly with the state regulators and assigns each a CAMELS 
rating.[Footnote 38] OCC examines federally chartered limited-purpose 
credit card banks every 12-18 months. 

FDIC and OCC focus on the exempt institutions' financial health and do 
not have the statutory authority to examine all relationships within 
the holding company structure that could pose risks to the exempt 
institution. However, beyond its focus on the insured institutions' 
safety and soundness, we found that FDIC examiners look at the exempt 
institutions' affiliate relationships as part of the examination. In 
particular, from our selected review of 11 examination reports that 
FDIC conducted of ILCs in 2008 through 2011, we found that FDIC 
examiners reviewed transactions between the ILCs and their affiliates. 
[Footnote 39] For example, most of the examination reports described 
the various affiliates, including holding company structure and 
affiliate transactions. According to FDIC's Risk Management Manual of 
Examination Policies, examiners should look at the affiliate 
transactions to determine whether the terms of these transactions are 
comparable to the terms of similar nonaffiliate transactions. FDIC 
examination reports included information on affiliate relationships 
and transactions and oversight of the exempt institution and, for most 
of the reports we reviewed, FDIC did not raise any issues with 
affiliate transactions. However, in one case FDIC noted that the 
exempt institution had used an affiliate for critical activities and 
in another reported a violation relating to affiliate transactions to 
an ILC because its parent holding company had used some of the ILC's 
assets as collateral. After FDIC had issued a recommendation that the 
management should ensure that affiliate agreements with third parties 
do not cause the bank's assets to be placed at risk, the ILC 
management sought reimbursement from the affiliate. 

Although OCC officials told us that affiliate transactions were 
reviewed for limited-purpose credit card banks and were considered an 
important part of the onsite examination, our analysis of seven OCC 
examination reports showed that affiliate transactions were generally 
not discussed in detail. According to an OCC lead examiner for credit 
card banks, aspects of affiliate transactions were included as part of 
their review of audit, earnings, and management for each of the 
limited-purpose credit card banks. Because many of the limited-purpose 
credit card banks rely on the holding company to provide funding for 
the receivables on a daily basis, the examiners review the 
transactions to ensure that they are in compliance with the law. The 
OCC examiner told us that if the examiners had not found any problems 
with affiliate transactions, the transactions would not be discussed 
in the reports. However, one examination report noted that a limited-
purpose credit card bank had poor documentation relating to its 
affiliate transactions and had paid an above-market rate to the 
holding company on a bank deposit. 

Oversight of S&Ls Is Evolving and Will Likely Differ from Previous 
Regulation: 

The oversight of S&Ls and their holding companies is evolving, with 
the significant changes likely occurring at holding company level. As 
of July 21, 2011, the Federal Reserve assumed responsibility for 
supervising S&L holding companies in accordance with the Dodd-Frank 
Act. The Federal Reserve plans apply certain elements of its 
consolidated supervisory program for bank holding companies to S&L 
holding companies.[Footnote 40] The consolidated supervision program, 
which applies primarily to large and regional bank holding companies, 
is aimed at assessing and understanding the bank holding company on a 
consolidated basis. In April 2011, the Federal Reserve issued a notice 
of intent to provide information to the S&L holding companies on how 
it plans to supervise them and to solicit feedback. The notice covered 
consolidated supervision, the holding company rating system, capital 
adequacy, and small noncomplex holding companies.[Footnote 41] In 
particular, the Federal Reserve stated that it intended to apply the 
same type of consolidated supervision to the S&L holding companies 
that it applied to bank holding companies and that this supervision 
could entail more rigorous reviews of internal control functions and 
consolidated liquidity compared to their previous consolidated 
supervision. The notice stated that the supervision may also include 
discovery reviews of specific activities as the Federal Reserve 
attempts to expand its understanding of certain types of activities. 
[Footnote 42] Federal Reserve officials said that the agency would 
issue a notice for rulemaking and request for comments once a 
supervisory rating system had been developed.[Footnote 43] 

Federal Reserve officials also told us that the agency had organized 
S&L holding companies into groups based on their size and nonbanking 
activities for supervision purposes. Large, complex holding companies--
those with $50 billion or more in assets--will be assigned permanent 
onsite examination teams that will provide ongoing supervision. S&L 
holding companies with assets of between $10 billion and $50 billion 
will be assigned off-site examiners for monitoring that may not be 
continuous. For S&L holding companies with assets of less than $10 
billion, the Federal Reserve will depend largely on the primary 
federal regulator--either OCC or FDIC--for the exempt S&Ls. S&Ls with 
less than $10 billion in assets generally consist only of the S&L and 
a holding company and thus require less supervision at the holding 
company level, according to an OCC official. Relying on the work of 
the primary federal regulator is similar to the Federal Reserve's 
approach to supervising small "shell" bank holding companies. The 
primary federal bank regulator, either FDIC or OCC, is responsible for 
examining the bank, and the Federal Reserve reviews the holding 
company information, including financial data such as the capital and 
liquidity levels and the quality of the risk management at the holding 
company level.[Footnote 44] 

While the Federal Reserve plans to use its consolidated supervisory 
program for S&L holding companies, it still must decide how it plans 
to supervise grandfathered unitary S&L holding companies that engage 
in commercial activities. Federal Reserve officials acknowledged that 
the regulation and the supervision of grandfathered unitary S&L 
holding companies that engage in commercial activities presented 
unique supervisory challenges. They said they would look at these 
holding companies in a broader framework than OTS had used, because 
that approach had covered only the impact of the holding company on 
the S&L. These officials said the new framework that is being 
developed would allow them to supervise the holding company's 
financial activities but not its commercial activities. As noted 
earlier, the Dodd-Frank Act gave the Federal Reserve the authority to 
decide whether the grandfathered unitary S&L holding companies should 
establish intermediate holding companies for their financial 
activities.[Footnote 45] According to Federal Reserve officials, as of 
September 30, 2011, this decision had not been made for any of the 
grandfathered unitary S&L holding companies. Representatives from 
three grandfathered unitary S&L holding companies told us that in 
theory they supported the establishment of intermediate holding 
companies for their financial activities. But they added that their 
support would be contingent on the specifics of the intermediate 
holding company structure requirement. 

Conversely, the changes to the supervision of exempt S&Ls are likely 
to be less pronounced. OCC officials told us that they planned to 
supervise S&Ls in much the same way they supervised national banks and 
that their supervision would be the same for S&Ls owned by commercial 
and noncommercial holding companies. OCC will focus on the S&L--not 
its holding company--and use an approach that is similar to the bank 
supervision approach used by OCC bank examination staff. OCC has 
established mixed supervisory teams made up of both national bank and 
S&L examiners, with the goal of fostering learning and knowledge 
sharing on S&Ls throughout the organization.[Footnote 46] In addition, 
OCC officials told us that they planned to work with the Federal 
Reserve to coordinate supervision of S&Ls and their respective holding 
companies. OCC officials told us that, in particular, there would be 
greater coordination on midsize and large S&Ls, because some overlap 
may exist in how these institutions are regulated. 

Views on the Adequacy of Federal Regulation of Exempt Institutions Are 
Mixed: 

Representatives from the exempt financial institutions and an academic 
told us that the current regulatory framework was sufficiently robust. 
They noted that federal and state regulators were able to examine a 
wide variety of issues through their examination process and minimize 
certain risks, such as conflicts of interests between holding 
companies and their exempt institution subsidiaries, through the 
examination processes. Industry representatives also suggested that 
the low number of failures of exempt institutions during the last 
several years spoke to the robust oversight and strength of the 
holding company structures. According to our analysis of financial 
data, no limited-purpose credit card banks and two ILCs failed between 
2007 and 2010, compared with hundreds of bank failures. 

OCC officials told us that they had sufficient authority to examine 
the affiliates of national banks and could adequately examine the 
activities of the affiliates that may affect the bank. OCC regulatory 
and supervisory practices are the same regardless of whether the 
institution is owned by a bank holding company or not, according to 
OCC officials. FDIC officials believe that they can adequately 
supervise exempt institutions but acknowledged the safety and 
soundness benefits of consolidated supervision. FDIC officials told us 
that they tried to ensure that institutions complied with all 
applicable laws and regulations and had sufficient capital. If the 
parent company runs into trouble, FDIC imposes certain controls 
through cease-and-desist orders or other enforcement measures in order 
to insulate the insured depository institution from the failings of 
its parent company. In 2005, we reported that consolidated supervision 
was a recognized method of supervising an insured institution, its 
holding company, and affiliates. We noted that while FDIC had 
developed an alternative approach that it claimed has mitigated losses 
to the bank insurance fund, it did not have some of the explicit 
authorities that other consolidated supervisors possess, and its 
oversight over nonbank holding companies may be disadvantaged by its 
lack of explicit authority to supervise these entities, including 
companies that own large and complex ILCs.[Footnote 47] In 2007, FDIC 
officials noted in testimony that the number, size and types of 
commercial applicants had changed significantly causing the FDIC to 
carefully examine this new environment. FDIC officials further stated 
that these changes in ownership structures raise potential risks that 
deserve further study and represent important public policy issues 
that are most appropriately addressed by Congress. 

Federal Reserve and Treasury officials contend that the exemptions 
represent gaps in the current regulatory structure that pose risks to 
the financial system. Federal Reserve and Treasury officials said 
while exempt institutions have access to federal deposit insurance, 
most are not subject to consolidated supervision. As discussed 
earlier, these officials believe that the lack of consolidated 
supervision of institutions that are federally insured represent a 
supervisory "blind spot" that should be removed. In particular, no 
federal regulator of the exempt institutions, excluding S&Ls that are 
part of holding companies, has the authority to broadly review the 
holding company and the other nonbank subsidiaries within the holding 
company structure. As a result, some of the potential activities 
within the holding company that may affect the exempt institution may 
be missed. 

Treasury's 2009 regulatory reform proposal attempted to address these 
concerns by recommending that the exemptions to the BHC Act be removed 
and that companies owning ILCs, credit card banks, and trust banks 
become bank holding companies subject to Federal Reserve consolidated 
supervision.[Footnote 48] With its enactment in 2010, the Dodd-Frank 
Act included a 3-year moratorium on approving FDIC insurance for ILCs, 
credit card banks, and trust banks that are directly or indirectly 
owned or controlled by a commercial firm. The Dodd-Frank Act also 
established the Financial Stability Oversight Council (FSOC), which is 
charged with determining whether institutions are systemically 
important, among other responsibilities.[Footnote 49] If FSOC were to 
designate an exempt institution or its holding company as a 
systemically important nonbank financial firm, it would be regulated 
and supervised by the Federal Reserve. A Federal Reserve official 
stated that exempt institutions could be identified as systemically 
important nonbank financial firms. However, the official added that 
this designation would not address the unbalanced competition of ILCs 
or the other exempt institutions that would not be designated as 
systemically significant.[Footnote 50] These ILCs holding companies 
would still be able to lend and issue credit through their affiliates 
without receiving the same supervision and regulation as bank holding 
companies do, according to the Federal Reserve official. 

Removing BHC Act Exemptions Could Have Varying Implications: 

Removing Exemptions Would Likely Lead to Divestment or Changes in 
Business Models for Many Holding Companies with Exempt Institutions: 

According to representatives from limited-purpose credit card banks 
and ILCs, commercial holding companies would most likely divest 
themselves of their exempt institutions if the BHC Act exemptions were 
removed. The BHC Act restricts bank holding companies' involvement in 
commercial activities, among other things. Almost all representatives 
from exempt institutions that are owned by commercial holding 
companies told us that divestment was the likely outcome. For example, 
representatives of all five limited-purpose credit card banks and five 
ILCs owned by commercial holding companies that we spoke with told us 
that the parent companies would most likely divest, sell, or liquidate 
themselves of the exempt institutions. Several representatives from 
exempt institutions owned by noncommercial holding companies that we 
spoke with also told us that divestment was likely, although they 
identified other potential outcomes compared to their counterparts 
with commercial ownership. For example, three representatives from 
noncommercial ILCs that we interviewed told us that the holding 
company could be converted to a bank holding company, the ILC charter 
could be restructured, or the current business model could be altered 
to comply with BHC Act requirements. Representatives from one of the 
noncommercial companies we spoke with stated that the holding 
company's ability to compete against larger, more diversified 
commercial banks would be reduced. Representatives from grandfathered 
S&Ls owned by commercial companies similarly told us their companies 
would likely divest themselves of the S&L if the exemptions were 
removed. 

Although the Federal Reserve now has the authority to require the 
grandfathered unitary S&L holding companies to establish intermediate 
holding companies, current law does not address this issue for the 
other institutions that are exempt from the BHC Act. We asked 
representatives from ILCs and credit card banks owned by both 
commercial and noncommercial holding companies about establishing an 
intermediate holding company as a potential strategy if the exemptions 
were removed. Approximately half of the representatives from ILCs and 
limited-purpose credit card banks whom we interviewed stated that they 
were either uncertain about or opposed to the idea of an intermediate 
holding company. Some of the representatives that held this opinion 
argued that an intermediate holding company structure would not 
improve the current regulatory environment or foster greater safety 
and soundness within the overall holding company. However, 
representatives from one limited-purpose credit card bank stated that 
an intermediate holding company could potentially be a compromise. But 
they added that the utility of such an option would depend on how the 
policy was implemented and which financial activities were required to 
be conducted within the intermediate holding company. 

Representatives of exempt institutions also told us that divesting the 
exempt institutions could have additional implications for the holding 
companies, their customers, and their employees. 

* Changes in business models. Representatives from several ILCs and 
limited purpose credit card banks we interviewed told us that their 
exempt institution was an integral part of the parent holding 
company's business model. Specifically, they stated that the exempt 
institutions were used to help extend credit or streamline customer 
finance operations, lower lending or internal costs, or increase 
customer loyalty. Furthermore for some representatives, divesting 
their exempt institution would likely require changes in their 
business models or could reduce revenues for the holding company. For 
example, three ILCs that we spoke with indicated that divestment would 
result in a decrease in the parent holding companies' sales or 
revenue. Similarly, four of the five limited-purpose credit card banks 
we spoke with said that in order to continue offering credit without 
the BHC Act exemptions, they would likely have to use a third-party 
credit provider, such as one of the large banks that issue credit 
cards, and would lose interest and late fee income. 

* Changes in customer relationships. Representatives from six ILCs and 
two credit card banks indicated that losing the financial institution 
could result in a significant loss of customers, damage customer 
relations for the parent company, or both. Officials from one ILC 
stated that if the holding company could no longer rely on the BHC Act 
exemption and divested itself of its ILC, its current customers would 
lose access to the revolving credit that the company issued through 
the ILC. Furthermore, they said that the ability to offer credit cards 
increased customer loyalty and provided an additional credit option 
for customers. Officials from a limited-purpose credit card bank 
reported to us that owning a financial institution allowed the holding 
company to retain control of the customer experience over the entire 
life cycle of the transaction, from marketing to customer service and 
collection. 

* Increased costs of operations. Representatives from five ILCs and 
one credit card bank told us that losing the exemptions could increase 
costs. That is, if the parent companies divested themselves of their 
financial institutions, the parent companies' operating or internal 
costs could rise because of increased administrative costs--for 
example, from having to use third-party credit providers. Another 
group of representatives told us that the ILC charter allowed the 
institution to market its products nationally from the state of Utah, 
reducing operational costs. 

* Job losses. Representatives from two exempt institutions told us 
that if the BHC Act exemptions were removed and the parent company 
divested itself of the exempt institution, job losses would be likely 
at the both the financial institution and holding company levels. 

Additionally, representatives from municipal deposit banks told us 
that their holding companies would most likely decide to divest 
themselves of their municipal deposit banks if the exemptions to the 
BHC Act were removed. Representatives of the one trust bank we 
interviewed told us that its parent company would likely divest itself 
of the insured deposits--primarily certificates of deposit--if the 
exemption for trust banks was removed. According to the officials of 
the trust bank, the insured deposits and the depository institution 
were a small part of their overall business, and they would be able to 
carry out their trust functions without the insured deposits. They 
said that they primarily maintained the insured depository institution 
because it had been a part of the organization for historical reasons. 

Removing the Exemptions Would Likely Have a Limited Impact on the 
Overall Credit Market and Would Not Increase Concentration in Most 
Credit Markets: 

Market Shares for Exempt Institutions Limit Potential Impact on 
Overall Credit Market of Removing Exemptions: 

Removing the exemptions to the BHC Act would likely have a limited 
impact on the overall credit market given the small portion of the 
credit market that exempt institutions represent. As shown in table 4, 
ILCs and limited-purpose credit card banks each accounted for less 
than 1 percent of the loans on the balance sheets of FDIC-insured 
institutions in 2010, while municipal deposit banks and trust banks 
each accounted for no loans. In addition, S&Ls that were subsidiaries 
of grandfathered unitary S&L holding companies (grandfathered S&Ls) 
accounted for about 2.9 percent of loans, and other S&Ls accounted for 
about 4.6 percent of loans.[Footnote 51] Given the small market share 
of each type of exempt institution, any actions they might take if the 
exemptions were removed--including exiting the market altogether in 
the case of some grandfathered S&Ls, ILCs, and limited-purpose credit 
card banks--would likely have little impact on the overall credit 
market, at least at the national level. However, exempt institutions 
could have larger market shares in some regions and smaller market 
shares in others. To the extent that the credit market is segmented by 
region, the effects of removing the exemptions would likely be larger 
in regions where exempt institutions are a larger share of the market 
and smaller in regions where exempt institutions are a smaller share 
of the market. 

Table 4: Percentage of Total Loans and Leases on the Balance Sheets of 
ILCs, Limited-Purpose Credit Card Banks, Municipal Deposit Banks, and 
Trust Banks, as of June 30, 2010: 

Exempt institution type: ILCs; 
Percentage: 0.5%. 

Exempt institution type: Limited-purpose credit card banks; 
Percentage: 0.1%. 

Exempt institution type: Municipal deposit banks; 
Percentage: 0.0. 

Exempt institution type: Trust banks; 
Percentage: 0.0. 

Source: GAO analysis of data from FDIC, the Federal Reserve, OCC, and 
SNL Financial. 

Note: Figures show the dollar value of total loans and leases, net of 
unearned income, on the balance sheets of exempt institutions as a 
percent of the dollar value of total loans and leases, net of unearned 
income, on the balance sheets of all FDIC-insured institutions. This 
definition of the market likely overstates exempt institutions' market 
shares because it excludes other providers of credit, including 
uninsured affiliates of FDIC-insured institutions, finance companies, 
credit unions, and other institutions that are not FDIC-insured. 

[End of table] 

While removing the exemptions would likely have a limited impact on 
the overall credit market, doing so could have a larger impact on 
segments of the market in which exempt institutions have larger market 
shares. These shares remain relatively small, however. For example, in 
2010, ILCs accounted for about 1 percent of multifamily, commercial, 
and farm real estate loans and about 2 percent of non-credit-card 
consumer loans on the balance sheets of all FDIC-insured institutions, 
but they accounted for less than 1 percent of each of the five other 
types of loans we analyzed (construction and land development loans; 
residential mortgage loans; commercial, industrial, and agricultural 
production loans; credit card loans; and leases). Limited-purpose 
credit card banks, on the other hand, accounted for about 1 percent of 
credit card loans, but they accounted for less than 1 percent of 
construction and land development loans and almost none of any other 
type of loan. Grandfathered S&Ls accounted for no leases; less than 1 
percent of commercial, industrial, and agricultural production loans; 
and for 2 to 5 percent of each other type of loan. Other S&Ls 
accounted for more than 9 percent of residential mortgages, less than 
1 percent of credit card loans and leases, and for 1 to 5 percent of 
each other type of loan. Although the actions exempt institutions 
might take if the exemptions were removed may differ by the type of 
institution, the magnitude of the effects of these actions on credit 
markets--overall or in specific segments--are likely related to each 
type of exempt institution's share of the market. 

Removing Exemptions Would Likely Not Affect Concentration in Overall 
Credit Markets: 

The overall credit market would likely remain unconcentrated even if 
exempt institutions exited the market and transferred their loans to 
other institutions. To assess the impact of removing the exemptions on 
concentration among FDIC-insured institutions, we calculated the 
Herfindahl-Hirschman Index (HHI), a key statistical indicator used to 
assess market concentration and the potential for firms to exercise 
market power.[Footnote 52] As shown in table 5, the HHI for the 
overall loan market for 2010 is well below 1,500, the threshold for 
moderate concentration, as are the HHIs for six of the seven specific 
loan markets we analyzed (credit card loans were the exception). 
[Footnote 53] As a result, firms in the overall loan market and in 
most market segments likely have little ability to exercise market 
power by raising prices, reducing the quantity of credit available, 
reducing innovation, or otherwise harming customers. However, the HHI 
for the market for credit card loans is close to the threshold for 
moderate concentration, suggesting that one or more firms making 
credit card loans may have a moderate amount of market power. 
Furthermore, our HHIs are for the United States as a whole, and HHIs 
for markets in specific states or metropolitan areas within the U.S. 
are likely to be different. 

Table 5: HHI of Concentration among FDIC-insured Institutions in Loan 
Markets, 2010: 

Loan type: Commercial, industrial, and agricultural production loans: 
443. 

Loan type: Construction and land development loans: 207. 

Loan type: Consumer loans other than credit card loans: 696. 

Loan type: Credit card loans: 1,479. 

Loan type: Leases: 712. 

Loan type: Multifamily, commercial, and agricultural real estate: 125. 

Loan type: Residential mortgages: 645. 

Loan type: Total loans and leases: 477. 

Source: GAO analysis of data from FDIC, FRB, OCC, OTS, SEC, and SNL 
Financial. 

Note: Cells contain the HHI for loan markets, where the market is 
defined as the collection of FDIC-insured institutions. The HHI is 
calculated by summing the squared market shares of every firm in the 
market. We defined a firm as a group of institutions with the same 
parent company. For standalone institutions that do not have a parent 
company, the firm is the institution itself. The HHI ranges from 
10,000 to a number approaching 0, with higher values indicating a more 
concentrated market. Department of Justice and Federal Trade 
Commission guidelines as of August 19, 2010, suggest that an HHI 
between 0 and 1,500 indicates that a market is not concentrated, an 
HHI between 1,500 and 2,500 indicates moderately concentrated, and an 
HHI greater than 2,500 indicates high concentration, although other 
factors also play a role in determining market concentration. This 
definition of the market excludes other providers of credit, including 
uninsured affiliates of FDIC-insured institutions, finance companies, 
credit unions, and other institutions that are not FDIC-insured. Our 
estimates may be too high or too low, depending on the numbers and 
sizes of the credit providers we excluded. 

[End of table] 

If the exemptions were removed, some exempt institutions might exit 
the credit market and stop making loans. As previously discussed, 
representatives from some ILCs and limited-purpose credit card banks 
owned by commercial parent companies indicated that their parent 
companies would likely divest themselves of their exempt institutions 
if the exemptions were removed. To estimate the effect of the 
divestment of grandfathered S&Ls owned by commercial companies, we 
estimated the change in the HHI for each loan market in alternative 
scenarios in which all grandfathered S&Ls, all ILCs, or all limited-
purpose credit card banks ceased making loans and transferred the 
loans on their balance sheets to the firms remaining in the market. 
[Footnote 54] In the first scenario, we assumed that exiting 
institutions' loans were distributed proportionally among all 
remaining firms. In the second scenario, we assumed that the exiting 
institutions' loans were acquired by the largest remaining firm. 
[Footnote 55] The estimated changes in the HHIs indicated that the 
overall loan market was unlikely to become concentrated in any of 
these scenarios. Even in the event that all grandfathered S&Ls, all 
ILCs, or all limited-purpose credit card banks exited the credit 
market, the remaining firms would still have little market power and 
thus little ability to increase loan prices or reduce the quantity of 
loans available. In every market we analyzed, except credit card 
loans, estimated changes in the HHIs indicated that these markets were 
also unlikely to become concentrated in similar scenarios. However, 
our definition of the market excludes other providers of credit, 
including uninsured affiliates of FDIC-insured institutions, finance 
companies, credit unions, and other institutions that are not FDIC-
insured. Our estimates may be either overstated or understated, 
depending on the number and sizes of the credit providers we excluded. 

Although available data suggest a degree of concentration in the 
credit card loan segment, the likely impact of removing the exemptions 
on this market varies across institution types. We found that the HHI 
for the market for credit card loans in 2010 was close to the 
threshold for moderate concentration. However, under current 
conditions, estimated changes in the HHI were small--less than 100--in 
scenarios in which all ILCs or all limited-purpose credit card banks 
ceased making loans and transferred their portfolios to other FDIC-
insured institutions. Removing the exemptions for these institutions 
would likely not lead to significant increases in market power in the 
credit card loan market. In contrast, the HHI for the credit card loan 
market increased by more than 100 in scenarios in which grandfathered 
S&Ls ceased making credit card loans and transferred their portfolios 
to other FDIC-insured institutions. In these scenarios, the increase 
in concentration in the credit card loan market could be large enough 
to significantly increase market power for some of the remaining firms 
and might lead to price increases or reductions in availability of 
credit card loans. Once again, this definition of the market excludes 
other providers of credit, including uninsured affiliates of FDIC-
insured institutions, finance companies, credit unions, and other 
institutions that are not FDIC-insured. Our estimates may be either 
overstated or understated, depending on the number and sizes of the 
credit providers we excluded. 

Exempt Institutions Expressed Concerns about the Impact on Certain 
Markets of Removing the Exemption: 

Some representatives of exempt institutions also expressed concern 
that removing the exemptions could increase concentration in the 
market for credit card loans and reduce the availability of credit in 
certain niche markets. Representatives from five limited purpose 
credit card banks and several ILCs and their parent companies reported 
that if the exemptions were removed, the parent company would most 
likely divest itself of the credit card bank or ILC rather than 
convert to a bank holding company. As a result of divestment, some 
stated that their credit portfolios would most likely be acquired by 
large credit card issuers or banks, argued that divestment BHC Act 
exempt institutions could potentially increase credit market 
concentration, or restrict access to credit for some customers. Two 
exempt institutions said that credit to borrowers with limited access 
to general purpose credit would be affected. 

Representatives from several ILCs and two credit card banks also told 
us that they made a significant proportion of loans in niche markets, 
including student loans, small business loans, and vehicle and 
equipment loans and leases to businesses and consumers involved in 
activities such as specialized retail sales, insurance, transportation 
services, and taxi cab operations. Representatives from 3 exempt 
institutions and their parent companies also indicated that they 
offered specific credit products that commercial banks did not offer 
and served customers that commercial banks typically did not serve. 
One large credit card issuer told us that it had developed cobranded 
credit card arrangements for certain businesses, such as a small 
customer machinery tool manufacturer, and designed programs to serve a 
particular demographic for a particular retailer.[Footnote 56] This 
credit card issuer told us that it had invested substantial resources 
in developing a user friendly, secure, and reliable nationwide 
structure customized to a particular group in order to win cobranding 
relationships with retailers in niche markets. However, one academic 
we spoke with said that traditional banks and other lenders would 
likely not expand into niche consumer credit markets, because these 
institutions lacked the market expertise of such credit card banks and 
ILCs. The lack of data on activity in niche markets prevented us from 
measuring concentration and estimating potential changes to it in 
scenarios in which exempt institutions ceased to make loans. 
Representatives from some exempt institutions also expressed concerns 
about the availability of credit to certain niche markets if the 
exemptions were removed. 

Federal Reserve officials told us that they believed that credit would 
continue to be available to creditworthy customers, even if the 
exemptions were removed and some institutions no longer provided 
credit. When we discussed the issue of credit availability in niche 
markets with the Federal Reserve, an official explained that the 
agency generally used FDIC's Call Report data to analyze credit 
markets and that the reports did not include data on niche credit 
markets. Although Federal Reserve officials acknowledged that removing 
the exemptions for credit card banks and ILCs could affect the price 
and quantity of credit available in some niche markets in which those 
institutions operated, they expected that other financial institutions 
would step in and make credit available to qualified borrowers at 
prices determined by the market. The officials stated that they had 
not seen any data supporting the idea that exempt institutions offered 
better terms than commercial banks. Moreover, they stated that 
companies that currently owned exempt institutions could continue to 
provide credit to their customers through institutions without insured 
deposits, such as finance companies, which are not permitted to have 
insured deposits. One example of this type of nonbank finance company 
is the Ford Motor Credit Company, a wholly owned subsidiary of the 
Ford Motor Company that finances Ford automobiles and supports Ford 
dealers but does not accept FDIC-insured deposits. 

Views Varied on How Removing the Exemptions Would Impact Institutions' 
Safety and Soundness and Financial System Stability: 

Representatives from three exempt institutions stated that if the 
exemptions were removed, they would see no additional improvement in 
safety and soundness. Other exempt institution representatives 
explained that they did not consider consolidated supervision a 
stronger model than the FDIC and state regulator model for exempt 
institutions. In addition to not improving safety and soundness, some 
representatives from exempt institutions stated that removing the 
exemptions would likely result in further credit market concentration. 
For example, representatives from a limited-purpose credit card bank 
noted that their share of the market would likely be absorbed by large 
credit card issuers as their holding company would likely divest their 
institution if the exemptions were removed. 

OCC officials have not expressed concerns about the sufficiency of the 
current oversight of exempt institutions and FDIC officials 
acknowledged the safety and soundness benefits of consolidated 
supervision. Federal Reserve and Treasury officials maintained that 
the safety and soundness of exempt institutions would be improved if 
the BHC Act exemptions were removed because exempt institutions--and 
their holding companies--would be subject to consolidated supervision. 
Consolidated supervision allows regulators to understand an 
organization's structure, activities, resources, and risks, and to 
address financial, managerial, operational, or other deficiencies 
before they pose a danger to subsidiary depository institutions. 
However, Federal Reserve officials acknowledged that consolidated 
supervision needed to be improved in light of the financial problems 
experienced by several bank holding companies during the 2007-2009 
financial crisis but noted that they had learned many lessons from the 
crisis. For example, according to the Federal Reserve officials, 
regulated institutions, particularly large U.S. banking organizations, 
had complained to federal banking regulators, including the Federal 
Reserve, about unregulated entities taking over more of their 
business. Their concerns and influence contributed to a less than a 
rigorous application of safety and soundness standards by federal 
regulators, which was one of the causes for the recent financial 
crisis. Representatives from a former ILC holding company that became 
a bank holding company agreed with the Federal Reserve and Treasury's 
view on the merits of subjecting exempt institutions to consolidated 
supervision, noting, for example, that their holding company was now 
required to implement more robust risk management systems than it had 
previously maintained. 

Federal Reserve officials also stated that financial system stability 
would improve if the exemptions from the BHC Act were removed. They 
noted that the risk posed by the exempt institutions should not be 
discounted based on their relative size and small number of the 
institutions, as the size and number of the institutions could change 
in the future. For example, Federal Reserve officials told us that if 
the exemption were not removed and the Dodd-Frank moratorium expired, 
the number and size of ILCs could grow to the much higher levels that 
they had reached prior to the financial crisis. Furthermore, Federal 
Reserve officials noted that maintaining these exemptions resulted in 
differing regulatory oversight, raising questions about whether the 
exemptions provide an unfair competitive advantage. For example, 
holding companies of exempt institutions (aside from S&L holding 
companies) are not subject to the same level of scrutiny as bank 
holding companies--despite enjoying the benefits of being FDIC 
insured. Federal Reserve officials also cited other potential 
competitive concerns introduced by maintaining the exemptions. For 
example, a large company that owns an exempt insured depository 
institution could direct that institution to (unfairly) deny credit to 
the parent company's competitors. Moreover, the parent company could 
encourage the affiliated exempt insured depository institution to 
offer loans to the company's customers based on terms not offered to 
its competitor's customers. 

The impact of removing the exemption and addressing risks posed by 
exempt institutions varies. For example, the Dodd-Frank Act requires 
the holding companies for S&Ls, which are by far the largest in number 
and size, to be supervised by the Federal Reserve. S&L holding 
companies will be subject to capital requirements and other regulatory 
requirements similar to those applicable to bank holding companies. In 
contrast, the other exempt institutions are few in number and size, 
but their holding companies are not subject to Federal Reserve's 
supervision. In addition, the banking activities of the exempt 
institutions vary--for example, ILCs conduct activities similar to 
those of full-service commercial banks and limited-purpose credit card 
banks conduct few banking activities--and these activities carry 
different risks. The moratorium on approving federal deposit insurance 
for ILCs, credit card banks, and trust banks is set to expire in 2013. 
Federal Reserve officials told us that they plan to continue to watch 
changes in the number or size of exempt institutions, as they have 
previously, consistent with their position that the exemptions 
represent gaps in the regulatory structure which may pose risks to the 
financial system. They also said they would bring forward any concerns 
about exempt institutions which may pose a risk to financial system 
stability to FSOC. Ultimately, the decision to remove the BHC Act 
exemptions is a policy decision that involves trade-offs among a 
number of competing considerations, including potentially increasing 
concentration in certain credit markets and decreasing consumer choice 
and the availability of credit in certain regions and credit markets 
and addressing existing regulatory gaps and potential competitive 
impacts. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Federal Reserve, FDIC, OCC, 
the New York State Department of Financial Services, and Treasury for 
their review and comment. Treasury provided written comments that have 
been reprinted in appendix III. Treasury agreed with our description 
of the agency's views on the exemption from consolidated Federal 
Reserve supervision for holding companies owning companies exempt from 
the BHC Act definition of bank. In addition, Treasury noted that it 
recommends that the appropriate federal agencies maintain continued 
oversight to the extent legally permissible within their respective 
existing authorities over all holding companies owning insured 
depository institutions. We also received technical comments from the 
New York State Department of Financial Services, FDIC, and OCC, which 
we incorporated as appropriate. 

We are sending copies of this report to the appropriate congressional 
committees and to the relevant agencies. This report will also be 
available at no charge on our website at [hyperlink, 
http://www.gao.gov]. 

Should you or your staff have questions concerning this report, please 
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix IV. 

Signed by: 

A. Nicole Clowers: 
Director Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report examines (1) the number of certain institutions in the 
U.S. banking system that are exempt from the definition of bank in the 
Bank Holding Company Act (BHC Act) and identifies general 
characteristics of these institutions; (2) the federal regulatory 
system for the exempt financial institutions and views of exempted 
entities; and (3) the potential implications of subjecting holding 
companies for the exempt institutions to the BHC Act relating to the 
types of activities in which such institutions and their holding 
companies may engage, the availability and allocation of credit, the 
stability of the financial system and the economy, and the safe and 
sound operations of such institutions. 

Number of Institutions and General Characteristics: 

To determine the extent to which certain financial institutions were 
exempt from the BHC Act, we requested data from Federal Deposit 
Insurance Corporation (FDIC), Board of Governors for the Federal 
Reserve System (Federal Reserve), Office of the Comptroller of the 
Currency (OCC), and the Office of Thrift Supervision (OTS) relating to 
the number of exempt institutions, their geographic location, their 
asset size, and the parent holding company. We also interviewed 
officials from the FDIC and OCC to obtain their understanding of the 
exemptions listed in the BHC Act. Once we established the type of 
institutions that were exempted from the BHC Act, we collected data 
from the FDIC, Federal Reserve, and OCC on these institutions from 
2006 through 2010. The data included: asset size, geographic location, 
and primary federal regulators. We also interviewed the state banking 
departments of California, Nevada, New York, and Utah to collect 
information on the industrial loan companies (ILC) and municipal 
deposit banks, which are exempt from the definition of bank under the 
BHC Act and are state-chartered institutions. We tested the 
reliability of the data provided to us by the federal banking 
regulators and determined it to be sufficiently reliable for our 
purposes. To do this, we interviewed the regulators on how they 
identified institutions that were exempt from the BHC Act and what 
process they used to identify the institutions and then compared the 
lists from the federal banking regulators. As part of this comparison, 
we looked for any duplicates or inconsistency between the regulators. 

To determine whether ILCs, limited-purpose credit card banks, 
municipal deposit banks, and trust banks were owned by commercial 
holding companies, we reviewed information from the federal bank 
regulators on the holding companies of the exempt institutions and 
analyzed public information, if available, on the holding companies to 
identify the business segments of the company. The types of publicly 
available information that we examined included Securities and 
Exchange Commission's (SEC) filings and company annual reports. Using 
this information, we identified the annual gross revenue and the 
business segments that created the revenue. Using the activities 
listed in Section 4 (k) of the BHC Act, we compared the activities of 
the holding company listed in the public documents to identify the 
activities considered financial in nature and then determined the 
extent to which their 2010 annual gross revenue was produced by 
financial activities. In accordance with the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, if 15 percent or more of a 
company's activities were financial, we classified it as 
noncommercial. Companies that derived less than 15 percent of their 
revenue from financial activities were classified as commercial. 

Federal Regulatory System: 

To describe the federal regulatory system for the exempt financial 
institutions, we reviewed 18 examinations of exempt institutions with 
assets of $1 billion or more that FDIC and OCC conducted in 2009 and 
2010. We selected examinations for review based on the institutions' 
asset size, choosing larger institutions because of the potential 
risks they posed. The examinations we reviewed included 11 ILCs and 7 
limited-purpose credit card banks. Of the OCC-supervised limited-
purpose credit card banks, only one institution met our criteria so we 
reviewed the most recent examinations of the OCC-supervised limited-
purpose credit card banks. Our review of examinations did not include 
trust banks and municipal deposit banks because their asset sizes were 
much lower than $1 billion. We focused on the larger institutions 
because we determined that the regulators generally dedicated more 
resources to them, such as placing examiners onsite and concluded that 
if certain supervisory practices are not taken on the larger 
institutions, then they would not likely be implemented for the 
smaller institutions. We reviewed documentation from FDIC, the Federal 
Reserve, and OCC about their supervision practices, including 
information from both OCC and the Federal Reserve on how they plan to 
carry out their new responsibilities for savings and loans (S&L) and 
their holding companies. We interviewed officials from FDIC, the 
Federal Reserve, OCC, and OTS regarding the supervision of all BHC Act 
exempt institutions, including S&L and holding company supervision and 
an academic who recently completed a study on ILCs for a think tank 
organization.[Footnote 57] 

Implications of Removing Exemptions: 

To assess the extent to which credit markets are likely to be affected 
if the exemptions are removed, we calculated market shares for each 
type of exempt institution in loan markets as of June 30, 2010. We 
defined the market as the collection of all FDIC-insured institutions 
for which we could obtain balance sheet data as of June 30, 2010. 
[Footnote 58] We obtained lists of FDIC-insured institutions from the 
Summary of Deposits (SOD) data available on FDIC's website. We 
obtained balance sheet data from each institution's Call Report or 
Thrift Financial Report from SNL Financial, a financial industry 
database. Some institutions indicated that they were subsidiaries of 
other institutions in the data and that their parent institution 
reports consolidated balance sheet data for both institutions on the 
parent institution's balance sheet. In these cases, we removed the 
subsidiary institution from the sample in these cases to avoid double-
counting them. 

We identified seven groups of institutions: (1) commercial banks and 
all subsidiaries of bank holding companies, (2) limited-purpose credit 
card banks, (3) ILCs, (4) municipal deposit banks, (5) trust banks, 
(6) S&Ls that are subsidiaries of grandfathered unitary savings and 
loan holding companies ("grandfathered S&Ls"), and (7) other S&Ls. All 
institutions that are subsidiaries of bank holding companies are in 
the first group. The two groups of S&Ls are distinguished by the types 
of holding companies of which they are subsidiaries. Prior to the 
enactment of the Gramm-Leach-Bliley Act (GLBA) in 1999, unitary S&L 
holding companies could generally operate without activity 
restrictions. GLBA restricted companies that filed applications to 
acquire an S&L after May 4, 1999, to only engage in activities 
permissible for S&L holding companies. Existing unitary S&L holding 
companies were "grandfathered" and could continue to engage in any 
type of financial or commercial activities. Thus, some S&Ls are 
subsidiaries of grandfathered unitary S&L holding companies that are 
not subject to activity restrictions, while other S&Ls are either 
subsidiaries of holding companies that are subject to activity 
restrictions or are not subsidiaries of holding companies. 

We obtained lists of limited-purpose credit card banks, ILCs, 
municipal deposit banks, and trust banks as of September 30, 2010, or 
December 31, 2010, from FDIC, the Federal Reserve, and OCC. We then 
used institution histories obtained from FDIC's Bank Find website 
(Bank Find) to adjust those lists to reflect institutions' types as of 
June 30, 2010. We used FDIC's SOD data to identify S&Ls. To further 
identify grandfathered S&Ls, we obtained a list of grandfathered 
unitary S&L holding companies and their subsidiaries as of December 
31, 2010, from OTS. Because the unitary S&L holding companies were 
grandfathered in 1999, the savings and loans that were their 
subsidiaries as of December 31, 2010, must also have been their 
subsidiaries as of June 30, 2010. That is, an S&L could not have 
become a subsidiary of a grandfathered unitary S&L holding company 
between June 30, 2010, and December 31, 2010. Finally, we used FDIC's 
SOD data to identify commercial banks and all institutions that are 
subsidiaries of bank holding companies. All institutions that are 
subsidiaries of bank holding companies--including limited-purpose 
credit card banks, ILCs, municipal deposit banks, S&Ls, and trust 
banks--are put in the group containing commercial banks and bank 
holding company subsidiaries. 

We estimated each group's share of the market for various types of 
loans, including total loans and leases; construction and land 
development loans; residential mortgage loans, multifamily, 
commercial, and agricultural real estate loans; commercial, 
industrial, and agricultural production loans; credit card loans; 
consumer loans other than credit card loans; and leases. A group's 
market share is equal to the total dollar value of loans on the 
balance sheets of all institutions in the group as a percent of the 
total dollar value of loans on the balance sheets of all institutions 
in the market. 

To assess the extent to which the price of credit and the quantity of 
credit available are likely to be affected if the exemptions are 
removed, we calculated the Herfindahl-Hirschman Index (HHI) of market 
concentration in loan markets. The HHI is a key statistical indicator 
used to assess the market concentration and the potential for firms to 
exercise market power. The HHI reflects the number of firms in the 
market and each firm's market share, and it is calculated by summing 
the squares of the market shares of each firm in the market. For 
example, a market consisting of four firms with market shares of 30 
percent, 30 percent, 20 percent, and 20 percent has an HHI of 2,600 
(900 + 900 + 400 + 400 = 2600). The HHI ranges from 10,000 (if there 
is a single firm in the market) to a number approaching zero (in the 
case of a perfectly competitive market). That is, higher values of the 
HHI indicate a more concentrated market. Department of Justice and 
Federal Trade Commission guidelines as of August 19, 2010, suggest 
that an HHI between 0 and 1,500 indicates that a market is not 
concentrated, an HHI between 1,500 and 2,500 indicates that a market 
is moderately concentrated, and an HHI greater than 2,500 indicates 
that a market is highly concentrated, although other factors also play 
a role in determining market concentration. 

To calculate HHIs, we defined a firm as the collection of all FDIC-
insured institutions that are subsidiaries of the same parent company 
(for institutions that are subsidiaries of parent companies) or the 
institution itself (for institutions that are not subsidiaries of 
parent companies). Parent companies of FDIC-insured institutions are 
either bank holding companies, S&L holding companies, or other parent 
companies. We identified bank holding company parents and all their 
subsidiaries for each year using FDIC's SOD data. We obtained lists of 
S&L holding company parents and their OTS-regulated subsidiaries from 
OTS. Based on data for 2011, we assumed that each savings bank that is 
not a subsidiary of a bank holding company is either a standalone 
institution without a parent company or is the only FDIC-insured 
subsidiary of its parent holding company. We obtained data on other 
parent companies--the nonbank holding company, non-S&L holding company 
parent companies of some credit card banks, industrial loan companies, 
and trust banks--for 2010 from FDIC and OCC. A limitation of this 
strategy is that we may not have identified all the institutions that 
belong to the same other parent company. As a result, our HHIs may 
understate the amount of concentration in the market. 

We calculated the HHI for the markets for various types of loans, 
including total loans and leases; construction and land development 
loans; residential mortgage loans; multifamily, commercial, and 
agricultural real estate loans; commercial, industrial, and 
agricultural production loans; credit card loans; consumer loans other 
than credit card loans; and leases. We first calculated each firm's 
market share as the total dollar value of loans on the balance sheets 
of all institutions in the firm as a percent of the total dollar value 
of loans on the balance sheets of all institutions in the market. We 
then summed the squared market shares of every firm in the market to 
obtain the HHI for that market. 

For groups composed of grandfathered S&Ls (part of a unitary S&L 
holding company), ILCs, and limited-purpose credit card banks, we 
estimated the change in the HHI for each loan market in alternative 
scenarios in which each group of exempt institutions ceases to make 
loans and transfers the loans on its balance sheets among firms in the 
market. In the first scenario, we assumed that the exiting 
institutions' loans are distributed proportionally among remaining 
firms. In the second scenario, we assumed that the exiting 
institutions' loans are acquired by the largest firm remaining in the 
market. 

A limitation of including only FDIC-insured institutions in our market 
share and HHI calculations is that we exclude many institutions that 
do not have FDIC insurance but that provide credit, such as uninsured 
affiliates of FDIC-insured institutions, credit unions, and finance 
companies. Capital markets are another source of funds. Thus, our 
calculations may overstate exempt institutions' share of loan markets. 
Furthermore, our calculations may either overstate or understate the 
amount of concentration in loan markets, depending on the numbers and 
sizes of the firms we are excluding. 

Our analysis implicitly assumes loan markets are national markets, 
that is, that credit provided by an institution is available to any 
potential borrower, regardless of their respective geographic 
locations. We make this assumption because subnational loan data are 
not readily available. If loan markets are not national in scope, then 
our market share and market concentration estimates are unlikely to 
represent those that we would estimate for a specific subnational 
geographic region, such as a state or metropolitan area. The market 
share and market concentration estimates for some regions would likely 
be greater than our national estimates, while others would likely be 
lower. 

We assessed the reliability of all of the data used to determine the 
potential implications of removing the exemptions and found that the 
data were sufficiently reliable for our purposes. To do this, we 
interviewed the regulators on how they identified institutions that 
were exempt from the BHC Act and what process they used to identify 
the institutions and then compared the lists from the federal banking 
regulators. 

In addition to these quantitative analyses, we interviewed 
representatives from 31 exempt institutions and representatives from 
the American Bankers Association and the Independent Community Bankers 
Association to learn more about their views regarding the BHC Act 
exemptions and possible implications of the institutions losing their 
exempt status. In addition, we interviewed representatives from two 
ILC holding companies that recently became bank holding companies to 
obtain their views on bank holding company supervision from the 
perspective of a former ILC holding company. We selected the 
institutions for interview based primarily on the size of the 
exemption institutions and the commercial status of the holding 
company. We attempted to interview the largest institutions and those 
which were held by holding companies that would be considered 
commercial. We conducted a content analysis of the qualitative 
information that we obtained from these interviews to identify themes 
that emerged. We also interviewed FDIC, Federal Reserve, OCC and 
Department of the Treasury officials to obtain their views on the 
implications of removal the exemptions. In addition, we interviewed 
three commercial banks, which are large credit card issuers, to 
collect additional information on potential concentration in credit 
card issuing if the exemptions were removed. 

We conducted this performance audit between October 2010 and January 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Financial Institutions Exempt under the Bank Holding 
Company Act and the Holding Company Commercial Status: 

Certain companies are exempt from the regulation as bank holding 
companies under the Bank Holding Company Act (BHC Act) because their 
subsidiaries do not meet the definition of a "bank" under the BHC Act. 
These exempt institutions include savings and loans (S&L), industrial 
loan corporations, limited-purpose credit card banks, municipal 
deposit banks, and trust banks. While S&L holding companies are not 
regulated under the BHC Act, after the Dodd-Frank Act, their treatment 
will be similar to that of bank holding companies. Therefore, we 
exclude S&Ls from this analysis. We identified 57 exempt institutions: 
34 industrial loan corporation (ILC), 10 limited-purpose credit card 
banks, 10 municipal deposit banks, and 3 trust banks. 

Industrial Loans Corporations: 

Excluding S&Ls, ILCs comprise the largest number of institutions that 
rely on the BHC Act exemption. As of September 30, 2011, there were 34 
ILCs (see table 6). 

Table 6: Industrial Loan Corporations, as of September 30, 2011: 

Name: UBS Bank USA; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $31,465.2; 
Holding company: Noncommercial. 

Name: USAA Savings Bank; 
City: Las Vegas; 
State: Nevada; 
Assets (in millions): $13,957.3; 
Holding company: Noncommercial. 

Name: Capmark Bank; 
City: Midvale; 
State: Utah; 
Assets (in millions): $6,721.8; 
Holding company: Noncommercial. 

Name: BMW Bank of North America; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $9,320.6; 
Holding company: Noncommercial. 

Name: Sallie Mae Bank; 
City: Murray; 
State: Utah; 
Assets (in millions): $6,524.5; 
Holding company: Noncommercial. 

Name: GE Capital Financial; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $8,423.8; 
Holding company: Noncommercial. 

Name: CapitalSource Bank; 
City: Los Angeles; 
State: California; 
Assets (in millions): $6,371.8; 
Holding company: Noncommercial. 

Name: Beal Bank; 
City: Las Vegas; 
State: Nevada; 
Assets (in millions): $5,958.1; 
Holding company: Noncommercial. 

Name: Woodlands Commercial Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $2,160.8; 
Holding company: Noncommercial. 

Name: Optumhealth Bank; 
City: West Valley City; 
State: Utah; 
Assets (in millions): $1,720.8; 
Holding company: Noncommercial. 

Name: Merrick Bank; 
City: South Jordan; 
State: Utah; 
Assets (in millions): $1,148.3; 
Holding company: Unknown. 

Name: Wright Express Financial Services Corporation; 
City: Midvale; 
State: Utah; 
Assets (in millions): $1,365.4; 
Holding company: NonCommercial. 

Name: Toyota Financial Savings Bank; 
City: Henderson; 
State: Nevada; 
Assets (in millions): $799.9; 
Holding company: Commercial. 

Name: Centennial Bank; 
City: Fountain Valley; 
State: California; 
Assets (in millions): $728.6; 
Holding company: Noncommercial. 

Name: Pitney Bowes Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $749,7; 
Holding company: Commercial. 

Name: Fireside Bank; 
City: Pleasanton; 
State: California; 
Assets (in millions): 276.1; 
Holding company: Noncommercial. 

Name: Finance Factors; 
City: Honolulu; 
State: Hawaii; 
Assets (in millions): $537.2; 
Holding company: Unknown. 

Name: Medallion Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $601.1; 
Holding company: Noncommercial. 

Name: Transportation Alliance Bank; 
City: Ogden; 
State: Utah; 
Assets (in millions): $537.9; 
Holding company: Unknown. 

Name: World Financial Capital Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $596.9; 
Holding company: Noncommercial. 

Name: First Security Business Bank; 
City: Orange; 
State: California; 
Assets (in millions): $490.4; 
Holding company: Noncommercial. 

Name: Community Commerce Bank; 
City: Claremont; 
State: California; 
Assets (in millions): $340.0; 
Holding company: Unknown. 

Name: Enerbank USA; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $436.4; 
Holding company: Commercial. 

Name: Circle Bank; 
City: Novato; 
State: California; 
Assets (in millions): $305.5; 
Holding company: Noncommercial. 

Name: Celtic Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $219.5; 
Holding company: Unknown. 

Name: Balboa Thrift and Loan; 
City: Chula Vista; 
State: California; 
Assets (in millions): $202.0; 
Holding company: Unknown. 

Name: Finance & Thrift Co.; 
City: Porterville; 
State: California; 
Assets (in millions): $124.7; 
Holding company: Noncommercial. 

Name: WebBank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $77.9; 
Holding company: Noncommercial. 

Name: LCA Bank Corporation; 
City: Park City; 
State: Utah; 
Assets (in millions): $65.1; 
Holding company: Unknown. 

Name: Rancho Santa Fe Thrift and Loan; 
City: San Marcos; 
State: California; 
Assets (in millions): $42.9; 
Holding company: Unknown. 

Name: Target Bank; 
City: Salt Lake City; 
State: Utah; 
Assets (in millions): $43.3; 
Holding company: Commercial. 

Name: Minnesota First Credit and Savings; 
City: Rochester; 
State: Minnesota; 
Assets (in millions): $28.6; 
Holding company: Unknown. 

Name: Eaglemark Savings Bank; 
City: Carson City; 
State: Nevada; 
Assets (in millions): $39.1; 
Holding company: Commercial. 

Name: First Electronic Bank; 
City: Sandy; 
State: Utah; 
Assets (in millions): $7.5; 
Holding company: Unknown. 

Total assets (in millions): $102,389.0. 

Source: FDIC. 

Note: Assets are as of June 30, 2011. FDIC is the federal regulator 
for all ILCs. 

[End of table] 

Limited-Purpose Credit Card Banks: 

Limited-purpose credit card banks are also exempt under the BHC Act. 
As of September 30, 2011, there were 10 limited-purpose credit card 
banks (see table 7). 

Table 7: Limited-Purpose Credit Card Banks, as of September 30, 2011: 

Name: World Financial Network NB; 
City: Wilmington; 
State: Delaware; 
Assets (in millions): $4,736.5; 
Federal regulator: FDIC; 
Parent company: Noncommercial. 

Name: World's Foremost Bank; 
City: Sidney; 
State: Nebrasks; 
Assets (in millions): $3,305.5; 
Federal regulator: FDIC; 
Parent company: Commercial. 

Name: TCM Bank, N.A.; 
City: Tampa; 
State: Florida; 
Assets (in millions): $158.9; 
Federal regulator: OCC; 
Parent company: Unknown. 

Name: Target NB; 
City: Sioux Falls; 
State: South Dakota; 
Assets (in millions): $111.9; 
Federal regulator: OCC; 
Parent company: Commercial. 

Name: Credit One Bank, N.A.; 
City: Las Vegas; 
State: Nevada; 
Assets (in millions): $87.0; 
Federal regulator: OCC; 
Parent company: Unknown. 

Name: Credit First, N.A.; 
City: Brook Park; 
State: Ohio; 
Assets (in millions): $27.0; 
Federal regulator: OCC; 
Parent company: Commercial. 

Name: Talbots Classics NB; 
City: Lincoln; 
State: Rhodie Island; 
Assets (in millions): $12.1; 
Federal regulator: OCC; 
Parent company: Commercial. 

Name: Cedar Hill NB; 
City: Charlotte; 
State: North Carolina; 
Assets (in millions): $11.3; 
Federal regulator: OCC; 
Parent company: Commercial. 

Name: ITS Bank; 
City: Johnston; 
State: Iowa; 
Assets (in millions): $5.4; 
Federal regulator: FDIC; 
Parent company: Unknown. 

Name: DSRM National Bank; 
City: Albuquerque; 
State: New Mexico; 
Assets (in millions): $3.5; 
Federal regulator: OCC; 
Parent company: Commercial. 

Total assets (in millions): $8,459.1. 

Sources: FDIC and OCC. 

Note: Assets are as of June 30, 2011 as more recent data were not 
available. 

[End of table] 

Municipal Deposit Banks: 

Municipal deposit banks are another type of exempt financial 
institution. As shown in table 8, all 10 municipal deposit banks are 
located in New York. 

Table 8: Municipal Deposit Banks, as of September 30, 2011: 

Name: Flushing Commercial Bank; 
City: North New Hyde Park; 
State: NY; 
Assets (in millions): $567.5; 
Holding company: Noncommercial. 

Name: Provident Municipal Bank; 
City: Montebello; 
State: NY; 
Assets (in millions): $422.8; 
Holding company: Noncommercial. 

Name: Greene County Commercial; 
City: Catskill; 
State: NY; 
Assets (in millions): $161.6; 
Holding company: Noncommercial. 

Name: State Bank Of Chittenango; 
City: Chittenango; 
State: NY; 
Assets (in millions): $153.6; 
Holding company: Noncommercial. 

Name: Pathfinder Commercial Bank; 
City: Oswego; 
State: NY; 
Assets (in millions): $52.9; 
Holding company: Noncommercial. 

Name: Pioneer Commercial Bank; 
City: Troy; 
State: NY; 
Assets (in millions): $49.3; 
Holding company: Noncommercial. 

Name: PCSB Commercial Bank; 
City: Brewster; 
State: NY; 
Assets (in millions): $40.3; 
Holding company: Noncommercial. 

Name: WSB Municipal Bank; 
City: Watertown; 
State: NY; 
Assets (in millions): $32.0; 
Holding company: Noncommercial. 

Name: Berkshire Bank Municipal Bank; 
City: Albany; 
State: NY; 
Assets (in millions): $35.5; 
Holding company: Noncommercial. 

Name: Emigrant Mercantile Bank; 
City: New York; 
State: NY; 
Assets (in millions): $3.8; 
Holding company: Noncommercial. 

Total assets (in millions): $1,519.4. 

Source: New York State Department of Financial Services. 

Note: FDIC is the federal regulator for all New York municipal deposit 
banks because they are state-chartered by the state of New York. 
Assets are as of June 30, 2011, as more recent data were not available. 

[End of table] 

Trust Banks: 

Trust banks are another type of exempt financial institution. Trust 
banks act as fiduciaries and as of September 30, 2011, there were 
three in operation (see table 9). 

Table 9: Federal Chartered Trust Banks, as of September 30, 2011: 

Name: Invesco National Trust Company; 
City: Atlanta; 
State: Georgia; 
Assets (in millions): $147.1; 
Federal Regulator: OCC; 
Parent company: Noncommercial. 

Name: Legg Mason Investment; 
City: Baltimore; 
State: Maryland; 
Assets (in millions): $67.7; 
Federal Regulator: OCC; 
Parent company: Noncommercial. 

Name: Fidelity Management and Trust Company; 
City: Boston; 
State: Massachusets; 
Assets (in millions): $103.5; 
Federal Regulator: FDIC; 
Parent company: Unknown. 

Total assets (in millions): $318.3. 

Source: OCC. 

Note: Assets are as of June 30, 2011, as more recent data were not 
available. 

[End of table] 

[End of section] 

Appendix III: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

January 13, 2012: 

Ms. A. Nicole Clowers: 
Director, Financial Markets: 
and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Clowers: 

The U.S. Treasury Department has reviewed the draft report of the U.S. 
Government Accountability Office titled, Bank Holding Company Act — 
Characteristics and Regulation of Exempt Institutions and the 
Implications of Removing the Exemptions. 

We would like to take this opportunity to commend you and your staff 
for the thorough analysis of the issues and accurate representation of 
agency views on the continued exemption of holding companies owning 
industrial loan corporations, limited purpose credit card banks, 
municipal deposit banks and trust banks from consolidated Federal 
Reserve supervision under and the activity restrictions imposed by the 
Bank Holding Company Act of 1956. 

As you accurately set forth in this GAO report, the Treasury 
Department continues to have significant concerns about the potential 
problems that may be caused in the future for sound oversight of the 
financial system, fair competition in the banking sector, and the 
protection of consumers in the United States. These concerns were 
addressed, as recognized in this GAO report, in the Treasury's 2009 
white paper, U.S. Department of the Treasury Regulatory Reform: A New 
Foundation: Rebuilding Financial Supervision and Regulation, June 17, 
2009. As recognized in your report, this Treasury white paper set 
forth Treasury's views on problems with and needed reforms to the 
regulation and supervision of the U.S. and international banking and 
financial systems in light of lessons learned from the recent 
financial crisis. 

As your report also recognizes, Treasury in its white paper expressed 
concern regarding the potential future problems that could arise from 
the continued exemption from consolidated Federal Reserve supervision 
and activity restrictions of the holding companies of industrial loan 
corporations, limited purpose credit card banks, and other exempt 
companies. Treasury continues to have concerns about potential future 
problems from these exemptions. Accordingly, Treasury recommends that 
the appropriate federal agencies maintain continued oversight to the 
extent legally permissible within their respective existing 
authorities over all holding companies owning insured depository 
institutions. 

We appreciate the opportunity to review the draft report. 

Sincerely, 

Signed by: 

Lance Auer: 
Deputy Assistant Secretary: 
Financial Institutions: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above Andrew Pauline, Assistant 
Director; Tarik Carter; Emily Chalmers; William Chatlos; Rachel 
DeMarcus; Nancy Eibeck, Fred Jimenez; Courtney LaFountain; Marc 
Molino; Tim Mooney; and Bob Rieke made major contributions to this 
report. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 84-511, 70 Stat. 133 (1956). Bank holding companies 
are companies that own or control a bank. 12 U.S.C. § 1841(a)(1). The 
BHC Act defines a bank as any of the following: (1) an insured bank or 
(2) an institution that both (a) accepts demand deposits or deposits 
that the depositor may withdraw by check or similar means for payment 
to third parties or others and (b) is engaged in the business of 
making commercial loans. 12 U.S.C. § 1841(c)(1). 

[2] An exempt ILC either must not engage in any activity it was not 
lawfully engaged in as of March 5, 1987, or must be organized under 
state law either extant or contemplated by the state legislature as of 
March 5, 1987, requiring ILCs to be FDIC insured and meet one of the 
following conditions: (1) not accept demand deposits, (2) have total 
assets of less than $100 million, or (3) not have been acquired after 
August 10, 1987. 12 U.S.C. § 1841(c)(2)(H). 

[3] The BHC Act does not exempt municipal deposit banks from the 
definition of "bank." Instead, companies that own or control municipal 
deposit banks are not defined as bank holding companies. 12 U.S.C. § 
1841(a)(5)(E). For purposes of this report, however, municipal deposit 
banks are referred to as exempt institutions. 

[4] The BHC Act defines exempt S&L associations as (1) any federal 
savings association or federal savings bank; (2) any building and loan 
association, savings and loan association, homestead association, or 
cooperative bank if such association or cooperative bank is a member 
of the Deposit Insurance Fund; or (3) any savings bank or cooperative 
bank that was previously deemed by the Director of the Office of 
Thrift Supervision to be a savings association under Section 10(l) of 
the Home Owners' Loan Act. 12 U.S.C. §§ 1841(c)(2)(B) 1841 (j). A 
residential mortgage is a document signed by a borrower when a home 
loan is made that gives the lender a right to take possession of the 
property if the borrower fails to pay off the loan. 

[5] Trust banks may not obtain payment services or borrowing 
privileges from the Federal Reserve. For this study, we identified 
only those trust banks that fell under the BHC Act exemption, (12 
U.S.C. § 1841(c)(2)(D)) and that accept insured deposits. Serving in a 
fiduciary capacity includes serving as trustee, executor, custodian, 
administrator, registrar of stocks and bonds, guardian of estates, or 
committee of estates and incompetents. The Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Pub. L. No. 111-203, § 604(i), 124 
Stat. 1376,1604 (2010), excluded companies that control limited-
purpose trust savings associations from regulation as S&L holding 
companies. 

[6] Enacted in 1999, the Financial Services Modernization Act (the 
Gramm-Leach-Bliley Act), Pub. L. No. 106-102, 113 Stat. 1338 (1999), 
allowed the continued exemption of ILCs, credit card banks, municipal 
deposit banks, and trust banks. 

[7] Section 603(a) of the Dodd-Frank Act, 12 U.S.C. § 1815 note. A 
"commercial firm" derives less than 15 percent of its annual gross 
revenues from activities that are financial in nature, as defined in 
section 4(k) of the BHC Act, or from ownership or control of 
depository institutions. 

[8] SNL Financial is a private database of financial data of banking, 
financial services, insurance and real estate. 

[9] Under the Dodd Frank Act, we were not required to determine 
whether the S&L holding companies were commercial or noncommercial. 
Certain holding companies owning a single S&L are exempt from the 
activity restrictions applicable to other S&L holding companies. 

[10] As of July 21, 2011, the Dodd-Frank Act abolished the Office of 
Thrift Supervision (OTS), which had regulated and supervised federally 
chartered S&Ls and all S&L holding companies; the Dodd-Frank Act 
transferred these responsibilities to OCC and the Federal Reserve, 
respectively. 

[11] The Consolidated Reports of Condition and Income (Call Reports) 
are a primary source of financial data used for the supervision and 
regulation of banks. They consist of a balance sheet, an income 
statement, and supporting schedules. The Report of Condition schedules 
provide details on assets, liabilities, and capital accounts. The 
Report of Income schedules provide details on income and expenses. 
Every national bank, state member bank, and insured state nonmember 
bank is required to file a consolidated Call Report normally as of the 
close of business on the last calendar day of each calendar quarter. 
The specific reporting requirements depend upon the size of the bank 
and whether it has any foreign offices. 

[12] Any one of the following circumstances will trigger coverage 
under the BHC Act: (1) stock ownership--the company owns, controls, or 
has the power to vote 25 percent or more of any class of the voting 
securities of a bank or bank holding company (either directly or 
indirectly or acting through one or more other persons); (2) ability 
to elect a board majority--the company controls the election of a 
majority of the directors or trustees of a bank or bank holding 
company; or (3) effective control of management--the Board determines, 
after notice and opportunity for hearing, that the company directly or 
indirectly exercises a controlling influence over the management or 
policies of a bank or bank holding company. For purposes of any such 
proceeding, it is presumed that any company that directly or 
indirectly owns, controls, or has power to vote fewer than 5 percent 
of any class of voting securities of a specific bank or bank holding 
company does not have the requisite control. See 12 U.S.C. § 
1841(a)(1),(2). 

[13] 12 U.S.C. § 1843(k)(1). The financial holding company can engage 
in activities that the Board determines (1) to be financial in nature 
or incidental to such financial activity, or (2) are complementary to 
a financial activity and does not pose a substantial risk to the 
safety and soundness of depository institutions or the financial 
system generally. The bank holding company and its depository 
institution subsidiaries must be well-capitalized and well-managed. 12 
U.S.C. § 1843(l)(1). 

[14] Pub. L. No. 73-43, 48 Stat. 128 (1933), 12 U.S.C. § 1461 et. seq. 

[15] HOLA permits an S&L holding company to engage in activities 
closely related to banking, activities permitted for financial holding 
companies, and certain other activities. The Dodd-Frank Act also 
requires S&L holding companies (other than grandfathered unitary S&L 
holding companies) to comply with certain requirements before they may 
engage in activities permissible for financial holding companies that 
previously applied only to bank holding companies. In order to conduct 
activities permissible for financial holding companies, S&L holding 
companies and their depository institution subsidiaries must be well-
capitalized and well-managed. 12 U.S.C. § 1467a(c)(2)(H). These 
restrictions on activities do not apply to grandfathered unitary 
thrift holding companies as explained in the following paragraphs. 

[16] The Dodd-Frank Act eliminated OTS, which chartered and supervised 
federally chartered S&Ls and S&L holding companies. 12 U.S.C § 5413. 
Rulemaking authority previously vested in OTS was transferred to OCC 
for S&Ls and to the Federal Reserve for S&L holding companies and 
their subsidiaries, other than depository institutions. 12 U.S.C. § 
5412. Supervision of state chartered S&Ls was transferred to FDIC. 12 
U.S.C. § 5412(b)(2)(C). The transfer of these powers was completed on 
July 21, 2011, and OTS was officially dissolved 90 days later (Oct. 
19, 2011). In September 2011, the Federal Reserve issued Regulation 
LL, an interim final rule, to govern S&L holding companies. See 76 
Fed. Reg. 56,508. S&L holding companies must obtain prior approval 
from the Federal Reserve for the formation of holding companies, the 
acquisition of control of depository institutions, and the merger of 
holding companies. 

[17] 12 U.S.C. § 1467a(c)(3); 12 U.S.C. § 1467a(c)(9). The subsidiary 
must meet the "qualified thrift lender" test and maintain a minimum 
percentage of its assets in qualified thrift investments. If the 
subsidiary fails the test, the holding company will become a bank 
holding company. 12 U.S.C. § 1467a(m)(3)(C). 

[18] As discussed more fully later in this report, federal law 
restricts transactions between an insured depository institution and 
its bank holding company affiliates. 

[19] Pub. L. No. 100-86, § 101, 101 Stat. 552, 554 (1987). 

[20] The exempt institutions that the Dodd-Frank Act required us to 
address are described at 12 U.S.C. §1841(c)(2)(F) for credit card 
banks; 12 U.S.C.§1841(c)(2)(H) for ILCs; 12 U.S.C. §1841(a)(5)(E) for 
municipal deposit banks; 12 U.S.C. §1841(c)(2)(B) for S&Ls; and 12 
U.S.C. §1841(c)(2)(D) for trust banks. 

[21] 12 U.S.C. § 1841(a)(5)(E) exempts companies owning any state-
chartered bank or trust company that is wholly owned by thrift 
institutions or savings banks and is restricted to accepting deposits 
from thrifts or savings banks; deposits from the business of the 
thrift or savings bank's business; and deposits of public monies. 12 
U.S.C. § 1841(a)(5)(F) exempts from bank holding company regulation 
trust companies and mutual savings banks that control one bank located 
in the same state that meets certain criteria. Both of these 
exemptions were enacted in the Bank Holding Company Act Amendments of 
1970, Pub. L. No. 91-607, § 101(a), 84 Stat. 1760 (1970). According to 
the Federal Reserve, the legislative history of this act indicates 
that the exemption in 12 U.S.C. § 1841(a)(5)(F) was intended to apply 
to Missouri trust companies and Rhode Island mutual savings banks that 
owned or controlled a bank, as authorized by state law, before 1971. 
According to Federal Reserve officials, supervisors in Rhode Island 
and Missouri have informed them that, as of December 2010, there were 
no trust companies or mutual savings banks operating under the 
exemption. See H.R. Rept. No. 91-1084, at 11 (1970). 

[22] For the purposes of this report, we define the U.S. banking 
system to be the collection of all FDIC-insured institutions. 

[23] The number and size (as measured by assets) of S&Ls have declined 
in recent years. In 2006, there were about 1,103 S&Ls with combined 
assets of $1.6 trillion. As of June 30, 2011, there were about 945 
S&Ls with combined assets of $0.9 trillion. S&Ls owned by bank holding 
companies were not included in the number of S&Ls we identified in 
2006 or 2011. An OCC official attributed this decline to statutory 
changes that removed the primary advantages of holding an S&L charter 
over commercial banks. Specifically, commercial banks can now branch 
across state lines, and S&Ls are now subject to the same preemption 
standards as national banks. Counts of ILCs, limited-purpose credit 
card banks, municipal deposit banks, and trust banks only include 
those that are not subsidiaries of bank holding companies. 

[24] In July 2006, FDIC imposed a 6-month moratorium on approving any 
deposit insurance applications and change in control notices for ILCs. 
In January 2007, this moratorium was extended for a year with respect 
to those deposit insurance applications and change in control notices 
filed by nonfinancial companies. The moratorium expired in January 
2008. Several large corporations had submitted applications to FDIC 
for deposit insurance prior to the--moratorium--such as Ford Motor 
Company; Wal-Mart Stores, Inc.; and the Home Depot, but they withdrew 
their applications before FDIC ruled on them. 

[25] Credit card issuers are any person who issues a credit card or 
the agent of such person with respect to such card. 

[26] General-purpose or universal credit cards can be used at a 
variety stores and businesses. Private-label credit cards are issued 
under an open-ended agreement and can be used to make purchases only 
at a single merchant or an affiliated group of merchants. 

[27] According to the Federal Reserve, municipal deposits banks are 
all located in the state of New York because under New York state law, 
savings banks cannot accept deposit from municipalities. The creation 
of a municipal deposit subsidiary bank allows the savings banks to 
accept these deposits. Although the municipal deposit banks have 
commercial bank charters, a company that owns or controls a municipal 
deposit bank is not a BHC. 

[28] Annual gross revenue is the total income of a business for 1 year. 

[29] For this report, we are using the term "noncommercial" rather 
than "financial holding company" to avoid confusing these holding 
companies with financial holding companies that are bank holding 
companies that make an election to be treated as financial holding 
companies. 

[30] Brokered deposits are deposits acquired through a deposit broker. 
"Deposit broker" means (1) any person engaged in the business of 
placing deposits, or facilitating the placement of deposits, of third 
parties with insured depository institutions, or any person in the 
business of placing deposits with insured depository institutions for 
the purpose of selling interests in those deposits to third parties, 
and (2) an agent or trustee who establishes a deposit account to 
facilitate a business arrangement with an insured depository 
institution to use the proceeds of the account to fund a prearranged 
loan. A demand deposit means that the depositor has a right to 
withdraw at any time without prior notice to the depository 
institution. Demand deposits are commonly offered in the form of 
checking accounts. 

[31] A bank holding company may own an insured bank that engages 
exclusively or predominantly in credit card activities. Credit card 
banks owned by bank holding companies may legally offer additional 
commercial banking services unless prohibited by the articles of 
association. These banks are "banks" under the BHC Act, and a company 
that owns one is subject to the BHC Act. The Dodd-Frank Act permits 
exempt credit card banks to provide small business loans. 

[32] A covered transaction includes a loan or extension of credit to 
an affiliate; a purchase of, or an investment in the securities issued 
by the affiliate, guarantees on behalf of an affiliate, and certain 
other transactions that expose the insured institution to the 
affiliate's credit or investment risk. An institution's affiliates 
include any company that controls or is controlled by the institution, 
and any company under common control with the institution. 12 U.S.C. § 
371c(b)(1). 

[33] 12 U.S.C. § 371c(a)(1). 

[34] 12 U.S.C. § 371c(a)(4). 

[35] 12 U.S.C. § 371c-1(a)(1). 

[36] For bank holding companies, we calculated the average of the 
ratio of equity capital to total assets for 2006-2010 using the data 
from bank holding companies' Form FR Y-9C filings. For parent holding 
companies of industrial loan corporations and limited purpose credit 
card banks that are not bank holding companies, we calculated the 
average of the ratio of equity to assets for 2006-2010 using balance 
sheet data from SNL Financial or from companies' annual report or 10-K 
filings. 

[37] Prior to the Dodd-Frank Act, the Federal Reserve required bank 
holding companies to serve as a source of strength as a matter of 
policy. Section 616(d) of the Dodd-Frank Act codified and enhanced 
that source of strength principle and applies it to S&L holding 
companies and to insured depository institutions that are not 
subsidiaries of bank holding companies or S&L holding companies. The 
Dodd-Frank Act defines source of strength as the ability of a company 
that directly or indirectly controls an insured depository institution 
to provide financial assistance to such insured depository institution 
in the event of financial distress. In addition to expanding the scope 
of the coverage to include any company that controls an insured 
institution, the Dodd-Frank Act requires the banking regulators to 
issue joint rules to implement the statute by July 21, 2012. 

[38] The CAMELS rating system comprises Capital, Asset Quality, 
Management, Earnings, Liquidity, and Sensitivity to Risk. 

[39] We reviewed a total of 18 examinations of exempt institutions 
with assets of $1 billion or more that FDIC and OCC conducted in 2010 
and 2011. We chose examinations of the largest banks (by asset size) 
because these institutions represented a greater financial risk. FDIC 
has statutory authority to examine any affiliate of a state nonmember 
bank (including an ILC) as necessary to determine the relationship of 
that affiliate to the bank and the effect of that relationship on the 
bank. 12 U.S.C. § 1820(b)(4). Only one limited-purpose credit card 
bank that OCC supervised had assets of $1 billion or more, which was 
one of our criteria for choosing examinations to review. Therefore, we 
judgmentally selected six other examinations, selecting the most 
recent examinations. 

[40] As the prior regulator of S&L holding companies, OTS had the 
authority to supervise the entire S&L holding company organizations 
and was considered a consolidated supervisor of S&L holding companies. 
OTS also had the authority to take enforcement actions against the 
holding company. 

[41] 76 Fed. Reg. 22662-22665. In July 2011 the Federal Reserve issued 
initial guidance concerning the Board's supervisory approach to S&L 
holding companies during the first supervisory cycle. The Federal 
Reserve noted that it will take time for supervisory staff to better 
understand an S&L holding company's operations and business model. The 
Federal Reserve also noted that S&L holding companies that engage in 
significant commercial, insurance, and broker-dealer activities may be 
included in separate supervisory portfolios. 

[42] A discovery review is an examination or inspection activity 
designed to improve the understanding of a particular business 
activity or control process, for purposes such as addressing a 
knowledge gap that was identified during the risk assessment process. 

[43] The Federal Reserve has not yet decided what type of supervisory 
rating system to use for the S&L holding companies but has decided 
against the system OTS had used, the CORE system. OTS's CORE System 
was the agency's rating system for evaluating the financial condition 
of the S&L holding companies. CORE means Capital, Organizational 
Structure, Risk Management, and Earnings. 

[44] A bank holding company might originate as a ''shell'' corporation 
organized by investors interested in purchasing a bank, or by a bank 
interested in reorganizing into a holding company structure in order 
to expand through acquisition of nonbank concerns or other banks. The 
management and board of directors of such a holding company are often 
the same as that of the bank. 

[45] A holding company can be organized in various ways. All holding 
companies have a parent company, but the structure of the overall 
company may consist of a number of intermediate holding companies, 
which in turn may hold other subsidiaries within the company. For 
example, GE Money Bank is an S&L that is held directly by General 
Electric Consumer Finance, Inc., an intermediate holding company, and 
the parent holding company is General Electric Company. 

[46] The Dodd-Frank Act included provisions governing the transfers of 
OTS staff to FDIC and OCC. Because all of OTS's rulemaking authority 
for both federal and state chartered S&Ls has been transferred to OCC, 
most of OTS employees were transferred to OCC, although some of OTS 
employees were transferred to FDIC. The Dodd-Frank Act did not specify 
any staff transfers to the Federal Reserve. Federal Reserve officials 
told us that they have hired about 25 former OTS employees to work on 
holding company supervision. 

[47] GAO, Industrial Loan Corporations: Recent Asset Growth and 
Commercial Interest Highlight Differences in Regulatory Authority, 
[hyperlink, http://www.gao.gov/products/GAO-05-621] (Washington, D.C.: 
Sept. 15, 2005). 

[48] U.S. Department of the Treasury, Financial Regulatory Reform: A 
New Foundation: Rebuilding Financial Supervision and Regulation (June 
17, 2009). 

[49] Systemically important financial institutions are important 
large, interconnected nonbank financial companies and financial market 
utilities that could pose a threat to U.S. financial stability. 

[50] The Dodd-Frank Act created FSOC and charged it with identifying 
and mitigating risk to the stability of the U.S. financial system, 
among other duties. As part of its responsibilities, FSOC can identify 
nonbank financial firms as systemically important. 

[51] Our earlier analysis was based on total assets, this market share 
analysis is based on total loans, which yields slightly different 
percentages. 

[52] The HHI reflects the number of firms in the market and each 
firm's market share, and it is calculated by summing the squares of 
the market shares of each firm in the market. For example, a market 
consisting of four firms with market shares of 30 percent, 30 percent, 
20 percent, and 20 percent has an HHI of 2,600 (900 + 900 + 400 + 400 
= 2,600). The HHI ranges from 10,000 (if there is a single firm in the 
market) to a number approaching zero (in the case of a perfectly 
competitive market). That is, higher values of the HHI indicate a more 
concentrated market. Department of Justice (DOJ) and Federal Trade 
Commission (FTC) guidelines as of August 19, 2010, suggest that an HHI 
between 0 and 1,500 indicates that a market is not concentrated, an 
HHI between 1,500 and 2,500 is moderately concentrated, and an HHI 
greater than 2,500 is highly concentrated, although other factors also 
play a role in determining market concentration. The HHI is one of the 
market concentration measures that government agencies, including DOJ 
and the FTC, use when assessing concentration to enforce U.S. 
antitrust laws. DOJ and FTC often calculate the HHI as the first step 
in providing insight into potentially anticompetitive conditions in an 
industry. However, the HHI is a function of firms' market shares, and 
market shares may not fully reflect the competitive significance of 
firms in the market. Thus, DOJ and FTC use the HHI in conjunction with 
other evidence of competitive effects when evaluating market 
concentration. 

[53] To calculate the HHI, we defined the market as the collection of 
FDIC-insured institutions. However, this definition of the market 
excludes many types of institutions that provide credit, including 
uninsured affiliates of FDIC-insured institutions, finance companies, 
credit unions, and other institutions that are not FDIC-insured. 
Capital markets are another source of funds for some market 
participants. Thus, the HHIs we calculate likely overstate the amount 
of concentration in loan markets. 

[54] These scenarios do not apply to S&Ls that are not subsidiaries of 
grandfathered unitary S&L holding companies because these S&Ls are 
either not subsidiaries of holding companies or are subsidiaries of 
nongrandfathered S&L holding companies. S&Ls that are not subsidiaries 
of holding companies do not have a holding company that would be 
affected if the exemptions were removed. S&L holding companies that 
are not grandfathered unitary S&L holding companies are subject to 
activity restrictions that are similar to those for financial holding 
companies and cannot engage in commercial activities. These S&L 
holding companies would likely have to make fewer adjustments to their 
activities than grandfathered unitary S&L holding companies that 
engage in commercial activities or parent companies of ILCs and 
limited-purpose credit card banks that engage in commercial activities 
if the exemptions were removed. 

[55] Exempt institutions and their parent companies have a variety of 
options for complying with the BHC Act in the event that the 
exemptions are removed. The likelihood that an exempt institution will 
exit the credit market depends on a variety of factors, including its 
specific exemption, whether or not it has a parent company, and, if it 
does, the type of activities in which its parent company engages. 
Thus, the purpose of this exercise is to establish an upper bound on 
the effect that removing the exemptions is likely to have on credit 
market concentration. 

[56] Cobranded credit cards involve partnerships between financial 
institutions and unaffiliated organizations, generally for-profit 
organizations such as airlines, automobile manufactures, and 
retailers. Like an affinity program, a contractual agreement governs 
the cobranded relationship, and the cobranded card usually carries the 
partner's logo. 

[57] As of July 21, 2011, the Dodd-Frank Act abolished OTS, which 
formerly had the authority to regulate and supervise federally 
chartered savings and loans associations and all S&L holding companies 
and OTS was officially dissolved 90 days later (Oct.19, 2011). 

[58] SNL Financial is a private database of financial data of banking, 
financial services, insurance and real estate. 

[End of section] 

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