FEDERAL REGULATION OF BANK HOLDING COMPANIES

THE PURPOSE OF THIS STUDY is to define public policy toward bank holding companies as represented by the Bank Holding Company Act of 1956, and to evaluate the administration of the Act as effective enforcement of that policy. It analyzes: (1) the history of the bank holding company movement, (2) the federal legislative activities which developed public policy toward bank holding companies before 1956, (3) the provisions of the Bank Holding Company Act of 1956, and (4) the administration of the Act from 1956 to 1961. The study finds that the central problem of legislation was to regulate bank holding company systems as consistently as possible with the way other types of banking organizations were regulated. The Act provided at least tentative answers to policy questions of state versus federal regulation, the type of organization to be regulated, the delegation of administrative authority, and criteria for acceptable bank holding company expansion and nonbanking activities. Although these broad problems are indicated, the study shows that the paramount purposes of the Act were: (1) to prevent monopoly or excessive concentration of banking power by bank holding company systems and (2) to prevent the potential misuse of bank funds in the common control of banking and nonbanking enterprises. The study finds that the Act was not intended to restrict the size or expansion of bank holding company systems per se. It was intended to insure that such expansion would meet certain qualifications under the supervision of the Board of Governors of the Federal Reserve System (the Board). The objectives of these qualifications are to maintain financially sound and well-managed bank holding company systems, to improve banking services for local communities, and to keep the size and extent of individual bank holding company systems "within limits consistent with adequate and sound banking, the public interest, and preservation of competition in banking." In an analysis of 28 case histories of administration, the study identifies the main principles, policies, and precedents of administrative action. Technically, the Board based its decisions in cases of proposed expansion on the "principle of outweighing benefits." This principle holds that a proposed acquisition of a bank by a holding company is acceptable as long as the Board determines that prospective benefits outweigh anticipated adverse effects. In practice, this usually meant the weighing of prospective benefits in the form of banking services for communities concerned as against an anticipated decline of competition in banking for the area. In actual administration, the Board tended to weigh prospective effects in favor of the proposed expansion as long as the company did not have, or stand to gain by the expansion, an undesirably high proportion of total banks or deposits in the economic trade area concerned. Arbitrary concentration ratios were not applied, but the evidence indicates that as soon as a company has or approaches control of 50 per cent or more of the total bank deposits in a given economic trade area, the Board will become more restrictive of that company's requests for further expansion in the area.