BANK HOLDING 

COMPANY ACT

Characteristics and 

Regulation of Exempt 

Institutions and the 

Implications of 

Removing the 

Exemptions

Report to Congressional Committees

January 2012

GAO-12-160

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-160, a report to 

congressional committees 

January 2012 

BANK HOLDING COMPANY ACT 

Characteristics and Regulation of Exempt 

Institutions and the Implications of Removing the 

Exemptions

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 GAO-12-160. For more information, 

contact A. Nicole Clowers 202-512-8678 or

clowersa@gao.gov. 
Page i GAO-12-160 Bank Holding Company Act

Letter 1 

Background 7

Exempt Financial Institutions Vary by Size, Ownership, Activities, 

and Risks 14

Federal Regulation of Exempt Institutions Differs across 

Regulators, and Views on Regulatory Adequacy Are Mixed 25

Removing BHC Act Exemptions Could Have Varying Implications 33

Agency Comments and Our Evaluation 45

Appendix I Objectives, Scope, and Methodology 46

Appendix II Financial Institutions Exempt under the Bank Holding 

Company Act and the Holding Company Commercial Status 53

Appendix III Comments from the Department of the Treasury 57

Appendix IV GAO Contact and Staff Acknowledgments 59

Tables

Table 1: Primary Federal Banking Regulators and Their Basic 

Functions, as of January 2012 7

Table 2: Certain BHC Act Exempt Institutions and Their Federal 

Regulators 14

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 20

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 37

Table 5: HHI of Concentration among FDIC-insured Institutions in 

Loan Markets, 2010 39

Table 6: Industrial Loan Corporations, as of September 30, 2011 53

Contents
Page ii GAO-12-160 Bank Holding Company Act

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

2011 55

Table 8: Municipal Deposit Banks, as of September 30, 2011 55

Table 9: Federal Chartered Trust Banks, as of September 30, 2011 56

Figures

Figure 1: Geographic Distribution of ILCs, Limited-Purpose Credit 

Card Banks, Trust Banks, and Municipal Deposit Banks, 

as of September 30, 2011 18

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 24

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

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Page 1 GAO-12-160 Bank Holding Company Act

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).1

 

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).

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 

 
 

Page 2 GAO-12-160 Bank Holding Company Act

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.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 

 

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). 
 

Page 3 GAO-12-160 Bank Holding Company Act

institutions or savings banks, deposits arising out of the corporate 

business of their owners, and deposits of public monies.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.4

• 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.

 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.

5

While these financial institutions are not considered banks under the BHC 

Act, each can offer deposit insurance under the Federal Deposit Insurance 

 

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.
 

Page 4 GAO-12-160 Bank Holding Company Act

Act (FDI Act).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 (DoddFrank 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.7

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.

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.

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 

 

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.
 

Page 5 GAO-12-160 Bank Holding Company Act

holding company.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.9

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.

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.

10

 

8

SNL Financial is a private database of financial data of banking, financial services, 

insurance and real estate. 

We interviewed officials from FDIC, the Federal 

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.

10As 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.
 

Page 6 GAO-12-160 Bank Holding Company Act

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.11

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, limitedpurpose 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 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.

 

11The 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.
 

Page 7 GAO-12-160 Bank Holding Company Act

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.

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 Basic function

OCC Charters and supervises national banks and federal S&Ls 

Federal Reserve 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 

FDIC Oversees state-chartered banks that are not members of the Federal Reserve System, as well as statechartered 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.

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.

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 

Background

Regulatory Framework for 

Holding Companies
 

Page 8 GAO-12-160 Bank Holding Company Act

‘‘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.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.13

The Home Owners’ Loan Act (HOLA), as amended sets forth the 

regulatory framework for S&L holding companies.

For example, financial holding companies can engage in 

securities underwriting and dealing, but would be prohibited, for example, 

from selling unrelated products. 

14

 

12Any 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).

 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 

1312 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).

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

Page 9 GAO-12-160 Bank Holding Company Act

banking and activities permissible for financial holding companies.15 With 

the abolishment of OTS, the Federal Reserve is now the regulator for 

these holding companies.16

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 

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.

 

15HOLA 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.

16The 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.
 

Page 10 GAO-12-160 Bank Holding Company Act

in commercial activities.17

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 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.

 

1712 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).
 

Page 11 GAO-12-160 Bank Holding Company Act

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.

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.18

 

18As discussed more fully later in this report, federal law restricts transactions between an 

insured depository institution and its bank holding company affiliates.

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 

Consolidated Supervision
 

Page 12 GAO-12-160 Bank Holding Company Act

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 
 

Page 13 GAO-12-160 Bank Holding Company Act

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.

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.19 The CEBA exemptions include 

ILCs, limited purpose credit card banks, trust banks and S&Ls.20

 

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

 One 

type of exempt institution, ILCs, began in the early 1900s as small, statechartered 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 

20The 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. 

BHC Act Exemptions
 

Page 14 GAO-12-160 Bank Holding Company Act

that was exempted by the Bank Holding Company Act Amendments of 

1970, municipal deposit banks. 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 Federal regulator

ILC • FDIC

Limited-purpose credit card bank • Federally chartered: OCC

• State chartered: FDIC

Municipal deposit bank • FDIC

Trust bank • Federally chartered: OCC

• State chartered: FDIC

S&L • 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.

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, 

 

2112 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). 

Exempt Financial 

Institutions Vary by 

Size, Ownership, 

Activities, and Risks
 

Page 15 GAO-12-160 Bank Holding Company Act

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.

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.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.

23

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 

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.

 

22For the purposes of this report, we define the U.S. banking system to be the collection of 

all FDIC-insured institutions.

23The 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.

Exempt Institutions Make 

Up about 7 Percent of the 

U.S. Banking System
 

Page 16 GAO-12-160 Bank Holding Company Act

for new ILCs in 2006, and no ILCs have been approved since then.24

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.

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 DoddFrank 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.

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.

26

 

24In 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. 

The 10 municipal deposit banks’ 

assets totaled $1.5 billion, and the three trust banks’ assets totaled about 

$318 million, as of June 2011.

25Credit card issuers are any person who issues a credit card or the agent of such person 

with respect to such card.

26General-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. 
 

Page 17 GAO-12-160 Bank Holding Company Act

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.27

 

27According 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. 

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. 
 

Page 18 GAO-12-160 Bank Holding Company Act

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

of September 30, 2011
 

Page 19 GAO-12-160 Bank Holding Company Act

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.28

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.

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.

29

 

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

29For 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. 

Ownership Type of the 

Holding Companies That 

Own Exempt Financial 

Institutions Is Often Not 

Clear
 

Page 20 GAO-12-160 Bank Holding Company Act

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 

Owned by 

noncommercial 

companies

Owned by 

commercial 

companies a Ownership 

undetermined

ILCs 19 5 10

Limited-purpose 

credit card banks 

1 6 3 

Municipal deposit 

banks 

10 0 0 

Trust banks 2 0 1 

Total 32 11 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. 

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.

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 

Exempt Institutions’ Risk 

Profiles Vary
 

Page 21 GAO-12-160 Bank Holding Company Act

demand deposits because of concerns about liquidity risks.30

• 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.

ILCs 

can provide a wide range of banking services and are able to make 

loans (including credit card loans) and investments, like commercial 

banks.

31

• 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.

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.

• 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, 

 

30Brokered 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.

31A 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. 
 

Page 22 GAO-12-160 Bank Holding Company Act

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.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.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.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.35

 

32A 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). 

 

3312 U.S.C. § 371c(a)(1). 

3412 U.S.C. § 371c(a)(4). 

3512 U.S.C. § 371c-1(a)(1). 
 

Page 23 GAO-12-160 Bank Holding Company Act

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.36

 

36For 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. 

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 fig. 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 limitedpurpose 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.
 

Page 24 GAO-12-160 Bank Holding Company Act

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

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. 

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 
 

Page 25 GAO-12-160 Bank Holding Company Act

for the exempt institution.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 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.

 

37Prior 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. 

Federal Regulation of 

Exempt Institutions 

Differs across 

Regulators, and Views 

on Regulatory 

Adequacy Are Mixed
 

Page 26 GAO-12-160 Bank Holding Company Act

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 statechartered limited-purpose credit card banks jointly with the state 

regulators and assigns each a CAMELS rating.38

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.

OCC examines federally 

chartered limited-purpose credit card banks every 12-18 months.

39

 

38The CAMELS rating system comprises Capital, Asset Quality, Management, Earnings, 

Liquidity, and Sensitivity to Risk. 

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 

39We 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 limitedpurpose 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.

Supervision of ILCs and 

Limited-Purpose Credit 

Card Banks Focuses on 

the Institutions’ Financial 

Condition
 

Page 27 GAO-12-160 Bank Holding Company Act

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.

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.40

 

40As 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. 

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 

Oversight of S&Ls Is 

Evolving and Will Likely 

Differ from Previous 

Regulation
 

Page 28 GAO-12-160 Bank Holding Company Act

adequacy, and small noncomplex holding companies.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.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.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” 

 

4176 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. 

42A 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.

43The 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.
 

Page 29 GAO-12-160 Bank Holding Company Act

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.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.45

 

44A 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.

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.

45A 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.
 

Page 30 GAO-12-160 Bank Holding Company Act

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.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.

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 

 

46The 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. 

Views on the Adequacy of 

Federal Regulation of 

Exempt Institutions Are 

Mixed
 

Page 31 GAO-12-160 Bank Holding Company Act

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.47

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.

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.

 

47GAO, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest 

Highlight Differences in Regulatory Authority, GAO-05-621 (Washington, D.C.: 

Sept. 15, 2005).
 

Page 32 GAO-12-160 Bank Holding Company Act

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.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.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.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.

 

48U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation:

Rebuilding Financial Supervision and Regulation (June 17, 2009).

49Systemically important financial institutions are important large, interconnected nonbank 

financial companies and financial market utilities that could pose a threat to U.S. financial 

stability. 

50The 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. 
 

Page 33 GAO-12-160 Bank Holding Company Act

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 

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
 

Page 34 GAO-12-160 Bank Holding Company Act

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 limitedpurpose 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 
 

Page 35 GAO-12-160 Bank Holding Company Act

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. 
 

Page 36 GAO-12-160 Bank Holding Company Act

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.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.

 

51Our earlier analysis was based on total assets, this market share analysis is based on 

total loans, which yields slightly different percentages.

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
 

Page 37 GAO-12-160 Bank Holding Company Act

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 Percentage

ILCs 0.5%

Limited-purpose credit card banks 0.1

Municipal deposit banks 0.0

Trust banks 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. 

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.
 

Page 38 GAO-12-160 Bank Holding Company Act

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.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).53

 

52The 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.

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.

53To 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.

Removing Exemptions 

Would Likely Not Affect 

Concentration in Overall 

Credit Markets
 

Page 39 GAO-12-160 Bank Holding Company Act

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

Loan type

Commercial, industrial, and agricultural production loans 443

Construction and land development loans 207

Consumer loans other than credit card loans 696

Credit card loans 1,479

Leases 712

Multifamily, commercial, and agricultural real estate 125

Residential mortgages 645

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 FDICinsured 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 FDICinsured institutions, finance companies, credit unions, and other institutions that are not FDICinsured. Our estimates may be too high or too low, depending on the numbers and sizes of the credit 

providers we excluded. 

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 
 

Page 40 GAO-12-160 Bank Holding Company Act

the firms remaining in the market.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.55

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 

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.

 

54These 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.

55Exempt 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.
 

Page 41 GAO-12-160 Bank Holding Company Act

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 FDICinsured 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.

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 

Exempt Institutions Expressed 

Concerns about the Impact on 

Certain Markets of Removing 

the Exemption
 

Page 42 GAO-12-160 Bank Holding Company Act

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.56

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 

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. 

 

56Cobranded 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.
 

Page 43 GAO-12-160 Bank Holding Company Act

the Ford Motor Company that finances Ford automobiles and supports 

Ford dealers but does not accept FDIC-insured deposits.

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.

Views Varied on How 

Removing the Exemptions 

Would Impact Institutions’ 

Safety and Soundness and 

Financial System Stability
 

Page 44 GAO-12-160 Bank Holding Company Act

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 
 

Page 45 GAO-12-160 Bank Holding Company 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.

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 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. 

A. Nicole Clowers

Director

Financial Markets and

 Community Investment

Agency Comments 

and Our Evaluation
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-12-160 Bank Holding Company Act

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.

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 statechartered 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) 

Appendix I: Objectives, Scope, and 

Methodology 

Number of Institutions and 

General Characteristics
Appendix I: Objectives, Scope, and 

Methodology

Page 47 GAO-12-160 Bank Holding Company Act

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.

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 limitedpurpose 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 

Federal Regulatory System
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-12-160 Bank Holding Company Act

company supervision and an academic who recently completed a study 

on ILCs for a think tank organization.1

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, 2010.2

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 GrammLeach-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 

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.

 

1

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). 

2

SNL Financial is a private database of financial data of banking, financial services, 

insurance and real estate. 

Implications of Removing 

Exemptions
Appendix I: Objectives, Scope, and 

Methodology

Page 49 GAO-12-160 Bank Holding Company Act

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 50 GAO-12-160 Bank Holding Company Act

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 51 GAO-12-160 Bank Holding Company Act

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 52 GAO-12-160 Bank Holding Company Act

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.
Appendix II: Financial Institutions Exempt 

under the Bank Holding Company Act and the 

Holding Company Commercial Status

Page 53 GAO-12-160 Bank Holding Company Act

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.

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 City State Assets (in millions) Holding company

UBS Bank USA Salt Lake City UT $31,465.2 Noncommercial

USAA Savings Bank Las Vegas NV 13,957.3 Noncommercial 

Capmark Bank Midvale UT 6,721.8 Noncommercial

BMW Bank of North America Salt Lake City UT

9,320.6

Noncommercial

Sallie Mae Bank Murray UT 6,524.5 Noncommercial

GE Capital Financial Salt Lake City UT 8,423.8 Noncommercial

CapitalSource Bank Los Angeles CA 6,371.8 Noncommercial 

Beal Bank Las Vegas NV 5,958.1 Noncommercial 

Woodlands Commercial Bank Salt Lake City UT 2,160.8 Noncommercial 

Optumhealth Bank West Valley City UT 1,720.8 Noncommercial

Merrick Bank South Jordan UT 1,148.3 Unknown

Wright Express Financial Services Corporation Midvale UT 1,365.4 NonCommercial

Toyota Financial Savings Bank Henderson NV 799.9 Commercial 

Centennial Bank Fountain Valley CA 728.6 Noncommercial

Pitney Bowes Bank Salt Lake City UT 749,7 Commercial 

Fireside Bank Pleasanton CA 276.1 Noncommercial

Appendix II: Financial Institutions Exempt 

under the Bank Holding Company Act and 

the Holding Company Commercial Status

Industrial Loans 

Corporations
Appendix II: Financial Institutions Exempt 

under the Bank Holding Company Act and the 

Holding Company Commercial Status

Page 54 GAO-12-160 Bank Holding Company Act

Name City State Assets (in millions) Holding company

Finance Factors Honolulu HI 537.2 Unknown

Medallion Bank Salt Lake City UT 601.1 Noncommercial

Transportation Alliance Bank Ogden UT 537.9 Unknown

World Financial Capital Bank Salt Lake City UT 596.9 Noncommercial

First Security Business Bank Orange CA 490.4 Noncommercial

Community Commerce Bank Claremont CA 340.0 Unknown

Enerbank USA Salt Lake City UT 436.4 Commercial 

Circle Bank Novato CA 305.5 Noncommercial

Celtic Bank Salt Lake City UT 219.5 Unknown

Balboa Thrift and Loan Chula Vista CA 202.0 Unknown

Finance & Thrift Co. Porterville CA 124.7 Noncommercial 

WebBank Salt Lake City UT 77.9 Noncommercial

LCA Bank Corporation Park City UT 65.1 Unknown

Rancho Santa Fe Thrift and Loan San Marcos CA 42.9 Unknown

Target Bank Salt Lake City UT 43.3 Commercial 

Minnesota First Credit and Savings Rochester MN 28.6 Unknown

Eaglemark Savings Bank Carson City NV 39.1 Commercial 

First Electronic Bank Sandy UT 7.5 Unknown

Total assets $102,389.0 

Source: FDIC.

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

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). 

Limited-Purpose Credit 

Card Banks
Appendix II: Financial Institutions Exempt 

under the Bank Holding Company Act and the 

Holding Company Commercial Status

Page 55 GAO-12-160 Bank Holding Company Act

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

Name City State Assets (in millions) Federal regulator Parent company

World Financial Network NB Wilmington DE $4,736.5 FDIC Noncommercial

World’s Foremost Bank Sidney NE 3,305.5 FDIC Commercial 

TCM Bank, N.A. Tampa FL 158.9 OCC Unknown

Target NB Sioux Falls SD 111.9 OCC Commercial 

Credit One Bank, N.A. Las Vegas NV 87.0 OCC Unknown

Credit First, N.A. Brook Park OH 27.0 OCC Commercial 

Talbots Classics NB Lincoln RI 12.1 OCC Commercial 

Cedar Hill NB Charlotte NC 11.3 OCC Commercial 

ITS Bank Johnston IA 5.4 FDIC Unknown

DSRM National Bank Albuquerque NM 3.5 OCC Commercial 

Total assets $8, 459.1 

Sources: FDIC and OCC.

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

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 City State Assets (in millions) Holding company

Flushing Commercial Bank North New Hyde Park NY $567.5 Noncommercial 

Provident Municipal Bank Montebello NY 422. 9 Noncommercial

Greene County Commercial Catskill NY 161.6 Noncommercial

State Bank Of Chittenango Chittenango NY 153.6 Noncommercial

Pathfinder Commercial Bank Oswego NY 52.9 Noncommercial

Pioneer Commercial Bank Troy NY 49.3 Noncommercial

PCSB Commercial Bank Brewster NY 40.3 Noncommercial

WSB Municipal Bank Watertown NY 32.0 Noncommercial

Berkshire Bank Municipal Bank Albany NY 35.5 Noncommercial

Emigrant Mercantile Bank New York NY 3.8 Noncommercial

Total assets $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 statechartered by the state of New York. Assets are as of June 30, 2011, as more recent data were not 

available. 

Municipal Deposit Banks
Appendix II: Financial Institutions Exempt 

under the Bank Holding Company Act and the 

Holding Company Commercial Status

Page 56 GAO-12-160 Bank Holding Company Act

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 City State Assets (in millions) Federal Regulator Parent company

Invesco National Trust Company Atlanta GA $147.1 OCC Noncommercial 

Legg Mason Investment Baltimore MD 67.7 OCC Noncommercial

Fidelity Management and Trust Company Boston MA 103.5 FDIC Unknown 

Total assets $318.3

Source: OCC.

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

Trust Banks
Appendix III: Comments from the Department 

of the Treasury

Page 57 GAO-12-160 Bank Holding Company Act

Appendix III: Comments from the 

Department of the Treasury
Appendix III: Comments from the Department 

of the Treasury

Page 58 GAO-12-160 Bank Holding Company Act
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 59 GAO-12-160 Bank Holding Company Act

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

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.

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250566)
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