Bank Holding Company Act: Characteristics and Regulation of Exempt Institutions and the Implications of Removing the Exemptions
Published: 2012-01-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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). The BHC Act establishes the legal  framework under which bank holding companies operate and establishes  their supervision, which puts bank holding companies and their banking  and nonbanking interests under the authority of the Board of Governors of  the Federal Reserve System (Federal Reserve). The BHC Act also limits  the types of activities that bank holding companies may conduct, either  directly or through nonbank subsidiaries. The restrictions, which are  designed to maintain the general separation of banking and commerce in  the United States, only allow bank holding companies to engage in  banking activities; to own and manage banks; and to engage in those  activities that the Federal Reserve has determined to be “closely related  to banking,” such as extending credit and servicing loans and performing  appraisals of real estate and tangible and intangible personal property,  including securities.
For various reasons, the BHC Act exempts from regulation certain  companies that own depository institutions; these subsidiaries are not  defined as banks for purposes of the BHC Act and thus the companies  that own them are not considered bank holding companies and are not  required to comply with the BHC Act’s restrictions. Only one type of these  companies—savings and loan holding companies—is subject to  regulation at the holding company level, as follows.
Industrial loan corporations. Industrial loan corporations (ILC) are  limited-service financial institutions that make loans and raise funds  by selling certificates called “investment shares” and by accepting  deposits. ILCs are distinguished from finance companies because  ILCs accept deposits in addition to making consumer loans. ILCs also  differ from commercial banks because most ILCs do not offer demand  deposit (checking) accounts.
Limited-purpose credit card banks. Limited-purpose credit card banks  are generally restricted to credit card lending, can maintain only one  office that accepts deposits, cannot accept demand deposits or  transaction accounts, do not accept savings or time deposits of less  than $100,000 (unless used as collateral for extensions of credit), and  do not engage in the business of making commercial loans (other  than small business loans).
Municipal deposit banks. Municipal deposit banks are state-chartered  institutions that are wholly owned by thrift institutions or savings banks  and restrict themselves to acceptance of deposits from thrift  institutions or savings banks, deposits arising out of the corporate  business of their owners, and deposits of public monies.
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.  As discussed in detail later in this report, S&L holding companies are  regulated by the Federal Reserve Board and are subject to  restrictions on the activities they conduct.
Trust banks. Trust banks are institutions that function solely in a  fiduciary capacity. All or substantially all of the deposits of such  institutions must be in trust funds. Trust banks must not permit insured  deposits to be marketed through affiliates and may not accept  demand deposits.
While these financial institutions are not considered banks under the BHC  Act, each can offer deposit insurance under the Federal Deposit Insurance  Act (FDI Act). Establishing or acquiring an institution that is not defined as a  bank under the BHC Act is the only avenue for commercial companies to  own depository institutions that are eligible for deposit insurance. However,  the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act), which was enacted in 2010, included a 3-year moratorium on  approving federal deposit insurance for ILCs, credit card banks, and trust  banks that are directly or indirectly owned or controlled by a commercial  firm.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.
In June 2009, the Department of the Treasury (Treasury) submitted a  Section 603 of the Dodd-Frank Act required us to conduct a study on certain  institutions that are exempt from the BHC Act definition of a “bank.” This  report examines (1) the number of these institutions in the U.S. banking  system that are exempt from the definition of bank in the BHC Act and their  general characteristics; (2) the federal regulatory system for the exempt  financial institutions and participants’ views on it; and (3) the potential  implications of subjecting the parents of the exempt institutions to the BHC  Act provisions relating to the types of activities in which such institutions may  engage, the availability and allocation of credit, the stability of the financial  system and the economy, and the safe and sound operations of such  institutions.
To determine the number of certain types of financial institutions that are  exempt from the definition of “bank” in the BHC Act and their general  characteristics, we analyzed data from FDIC, the Federal Reserve, the  Office of the Comptroller of the Currency (OCC), the Office of Thrift  Supervision (OTS) and SNL Financial relating to the number of exempt  institutions, their geographic location, their asset size, and their parent  holding company. 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. We  then compared the financial activities listed in Section 4(k) of the BHC Act  to the activities of the parent holding companies to determine the extent  to which financial activities contributed to the companies’ 2010 annual  gross revenue. In accordance with the Dodd-Frank Act, if 15 percent or  more of a company’s revenue was financial, we classified it as  noncommercial. Companies that derived less than 15 percent of their  revenue from financial activities were classified as commercial. We  assessed the reliability of the data we obtained from each of the sources  listed and determined that they were reliable for these purposes.
To describe the federal regulatory system for the exempt financial  institutions, we reviewed 18 examinations of exempt institutions with  assets of $1 billion or more that FDIC and OCC conducted in 2008  through 2011. We judgmentally selected examinations for review based  on the institutions’ asset size, choosing larger institutions because of the  potential risks they posed. The examinations we reviewed included ILCs,  and limited-purpose credit card banks. Our review of examinations did not  include trust banks and municipal deposit banks because none had  assets of more than $1 billion. We reviewed documentation from FDIC,  OCC, and the Federal Reserve about their supervisory practices,  including information from both the Federal Reserve and OCC on how  they planned to carry out their new responsibilities for S&Ls and their   We interviewed officials from FDIC, the Federal  holding companies.
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. We estimated  market shares for each type of exempt institution in various loan markets  for 2010. We also estimated loan market concentration for 2010 using the  Herfindahl-Hirschman Index, a measure that reflects both the number of  firms in the market and each firm’s market share. We assessed the  reliability of the data we obtained from each of the sources listed above  and determined that they were reliable for these purposes.
To analyze other potential implications of subjecting the companies that  own the exempt institutions to regulation under the BHC Act, we  judgmentally selected a number of exempt institutions to interview. We  interviewed representatives from 31 exempt institutions (ILCs, limited- purpose credit card banks, municipal deposit banks, S&Ls, and trust  banks) selected on the basis of size of the exempt institutions and the  commercial status of holding company. We also interviewed  representatives from the American Bankers Association and the  Independent Community Bankers Association. In addition, we interviewed  representatives from two ILC holding companies that recently became  bank holding companies to obtain their views on bank holding company  supervision from the perspective of a former ILC holding company. We  also interviewed officials from the Federal Reserve, OCC, FDIC, and  Treasury to obtain their views on removing the exemptions. See appendix  I for more information on our scope and methodology.
We conducted this performance audit between October 2010 and  January 2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: 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).
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.
subsections: section_title: Regulatory Framework for Holding Companies
paragraphs: The BHC Act, as amended, contains a comprehensive framework for the  supervision of bank holding companies and their nonbank subsidiaries.  Bank holding companies are companies that own or control a bank, as  defined in the BHC Act. Generally, any company that acquires control of  an insured bank or bank holding company is required to register with the  Federal Reserve as a bank holding company. The BHC Act defines  ‘‘control’’ of an insured bank to include ownership or control of blocks of  stock, the ability to elect a majority to the board of directors, or other  management prerogative. 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. For example, financial holding companies can engage in  securities underwriting and dealing, but would be prohibited, for example,  from selling unrelated products.
The Home Owners’ Loan Act (HOLA), as amended sets forth the  regulatory framework for S&L holding companies.  S&Ls are often part of holding company structures. Like bank holding companies, S&L  holding companies are subject to restrictions on the activities they  conduct. HOLA permits S&L holding companies to conduct activities that  the Federal Reserve Board has determined to be closely related to  banking and activities permissible for financial holding companies. With  the abolishment of OTS, the Federal Reserve is now the regulator for  these holding companies. The Dodd-Frank Act made significant  changes to the regulatory framework for S&L holding companies. The  Dodd-Frank Act amends HOLA and the BHC Act to create similar  requirements for both bank holding companies and S&L holding  companies. For example, the Dodd-Frank Act amended both the BHC Act  and HOLA to provide that the Federal Reserve Board has authority to  impose capital requirements on depository institution holding companies  by regulation or order, including bank holding companies and S&L holding  companies.
Before GLBA, commercial companies could own a single S&L without  becoming subject to the activities restrictions that apply to S&L holding  companies, and a number of commercial firms—such as General Electric;  Macy’s, Inc.; and Nordstrom, Inc.—acquired S&Ls. While GLBA  prohibited commercial activities for all S&L holding companies, it  “grandfathered” the companies that already owned an S&L subsidiary— that is, it allowed these companies to keep the existing S&L and engage  in commercial activities.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.
The Dodd-Frank Act generally does not restrict  In addition, the Dodd-Frank Act requires the Federal Reserve to require  all bank holding companies and S&L holding companies to serve as a  source of strength to their subsidiary depository institutions. The Federal  Reserve regulations governing S&L holding companies state that an S&L  holding company “shall serve as a source of financial and managerial  strength to its subsidiary savings associations.”  The Dodd-Frank Act  defines the term “source of strength” as the ability of a company that  directly or indirectly owns or controls an insured depository institution to  provide financial assistance in the event of financial distress of the  insured institution.  If an insured depository institution is not the subsidiary  of a bank holding company or an S&L holding company, the appropriate  federal regulator for the insured depository institution will require any  company that directly or indirectly controls the insured depository  institution to serve as a source of financial strength to the insured  depository institution.
The Dodd-Frank Act also made significant changes in the capital  requirements applicable to certain bank holding companies and S&L holding  companies. Depository institution holding companies will be subject to  minimum leverage and risk-based capital requirements on a consolidated  basis. These capital requirements must not be lower than the leverage and  risk-based capital requirements applicable to insured depository institutions  as in effect on July 21, 2010. In general, the new capital requirements will  apply to S&L holding companies beginning July 21, 2015.
section_title: Consolidated Supervision
paragraphs: 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. Adverse  intercompany transactions may include charging the insured depository  institution above-market prices for products or services, such as  information technology services, provided by an affiliate or requiring the  insured institution to purchase poor quality loans at inflated prices from an  affiliate, thus placing the insured institution at greater risk of loss. Market  risk is the risk to a banking organization’s financial condition resulting  from adverse movements in market prices due to such factors as  changing interest rates. Operational risk is the potential that inadequate  information systems, operations problems, breaches in internal controls,  or fraud will result in unexpected losses. From a practical standpoint,  insured depository institutions may be susceptible to operational risk  when they are dependent on or share in the products or services of a  holding company or its subsidiaries, such as information technology  services or credit card account servicing. If these entities ceased their  operations, the insured institution could be adversely impacted.  Reputational risk is the potential that negative publicity regarding an  institution’s or affiliate’s business practices, whether true or not, could  cause a decline in the customer base, costly litigation, or revenue  reductions. Operational or reputational risk that impacts the holding  company can also affect affiliates throughout the corporate structure.
The BHC Act has established a consolidated supervisory framework for  assessing the risks to a depository institution that could arise because of  its affiliation with other entities in a holding company structure.  Consolidated supervision of a bank holding company includes the parent  company and its subsidiaries and allows the regulator to understand the  organization’s structure, activities, resources, and risks and to address  financial, managerial, operational, or other deficiencies before they pose  a danger to the bank holding company’s subsidiary depository institutions.  According to Federal Reserve Board Supervisory Letter SR 08-9, the  agency has established capital standards for bank holding companies,  helping to ensure that they maintain adequate capital to support  groupwide activities, do not become excessively leveraged, and are able  to serve as a source of strength to their depository institution subsidiaries.  The Federal Reserve may generally examine holding companies and  their nonbank subsidiaries, subject to some limitations, to assess the  nature of the operations and financial condition of the holding company  and its subsidiaries, the financial and operational risks within the holding  company that may pose a threat to the safety and soundness of any  depository institution subsidiary, and the systems for monitoring and  controlling such risks, among other things.
As the new regulator for S&L holding companies, the Federal Reserve  has indicated that it intends, to the greatest extent possible taking into  account any unique characteristics of S&L holding companies and the  requirements of HOLA, to assess the condition, performance, and  activities of S&L holding companies on a consolidated basis in a manner  that is consistent with the Board’s established risk-based approach  regarding bank holding company supervision.
In contrast, FDIC and OCC do not have consolidated supervisory  authority over the holding companies for the exempt banking institutions  but do have full authority to apply to them the same federal regulatory  safeguards that apply to all insured banks and S&Ls. For example, FDIC  and OCC can impose conditions and examine agreements,  dependencies, and transactions between exempted depository  institutions and their holding companies (including affiliated entities) in  order to better ensure the safety and soundness of those institutions.  Furthermore, FDIC can terminate an exempted entity’s deposit insurance,  enter into agreements during the acquisition of an insured entity, and take  enforcement measures. In addition, FDIC possesses authority under  Section 10 of the FDI Act to examine the affairs of any affiliate of any  depository institution as may be necessary to disclose fully (1) the  relationship between such depository institution and any such affiliate and  (2) the effect of such relationship on the depository institution.
section_title: BHC Act Exemptions
paragraphs: 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.  The CEBA exemptions include  ILCs, limited purpose credit card banks, trust banks and S&Ls.type of exempt institution, ILCs, began in the early 1900s as small, state- chartered loan companies that served the borrowing needs of industrial  workers who were unable to obtain noncollateralized loans from  commercial banks. The ILC industry experienced significant asset growth  in the 2000s, and ILCs evolved from small, limited-purpose institutions to  a diverse group of insured financial institutions with a variety of business  models.  S&Ls are exempt institutions but S&L holding companies were  subject to holding company supervision by OTS and now the Federal  Reserve.  In addition, S&L holding companies are subject to restrictions  on activities set out in HOLA.  We also considered one type of institution     One  that was exempted by the Bank Holding Company Act Amendments of  1970, municipal deposit banks.
Table 2 identifies the federal regulators for the certain types of exempt  institutions.
section_title: Exempt Financial Institutions Vary by Size, Ownership, Activities, and Risks
paragraphs: Financial institutions that are exempt from the BHC Act definition of bank  make up a small percentage of the overall banking system—1,002  institutions (about 7 percent)—and include ILCs, limited-purpose credit card  banks, municipal deposit banks, trust banks with insured deposits, and  S&Ls. If S&Ls, which are different from the other types of exempt  institutions in that they are regulated by the Federal Reserve at the holding  company level, are excluded, the percentage drops to less than 1 percent,  or 57 institutions. Determining whether the holding companies that own  exempt institutions are commercial is difficult, given the lack of a standard  definition and limited publicly available data on exempt institutions. The risk  profiles for exempt institutions vary, reflecting differences in the institutions’  size, complexity, and level of banking and nonbanking activities.
subsections: section_title: Exempt Institutions Make Up about 7 Percent of the U.S. Banking System
paragraphs: 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.  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.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.
The 57 non-S&L exempt institutions were ILCs (34),  Aside from S&Ls, the largest category of exempt institutions is ILCs, which  have been declining in number and size in recent years. Since 2006, the  number of ILCs has declined from 58 to 34, and the assets of these  institutions have dropped from $212.7 billion to $102.4 billion. Federal  regulators and industry representatives attributed these declines to several  factors, but most frequently to the federal moratoriums on deposit insurance  for new ILCs. In particular, FDIC imposed a moratorium on deposit insurance  for new ILCs in 2006, and no ILCs have been approved since then.during the 2007-2009 financial crisis, a number of the larger ILC holding  companies applied and were approved to become bank holding companies,  including American Express Company; Goldman Sachs Group, Inc.; Morgan  Stanley; and GMAC Financial Services. Merrill Lynch & Co. also owned an  ILC that became part of the Bank of America Corporation, a bank holding  company, when it acquired Merrill Lynch in 2008. Subsequent to the FDIC  moratoriums, the Dodd-Frank Act placed a 3-year moratorium on FDIC  approval of deposit insurance applications received after November 23,  2009, for ILCs, credit card banks, and trust banks that were directly or  indirectly owned or controlled by a commercial firm. In addition, the Dodd- Frank Act provides that until July 21, 2013, FDIC may not approve any  change in control of an ILC, trust bank, or credit card bank that would place  the institution under the control of a commercial firm.
The combined assets of limited-purpose credit card banks, trust banks, and  municipal deposit banks totaled $10.3 billion as of June 30, 2011. The  assets of the 10 limited-purpose credit card banks, which issue only credit  cards, totaled $8.5 billion, and the assets of these limited-purpose credit  card banks ranged from $3 million to $4.7 billion. 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. The 10 municipal deposit banks’  assets totaled $1.5 billion, and the three trust banks’ assets totaled about  $318 million, as of June 2011.
Credit card issuers are any person who issues a credit card or the agent of such person  with respect to such card.
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. 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.
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. Using this definition, a number of  companies that are generally considered commercial would be  considered noncommercial because their revenue from financial activities  is 15 percent or more. For example, using this definition, the General  Electric Company is classified as noncommercial because its financial  services business segment accounted for more than 31 percent of its  2010 annual gross revenue.
Working within these challenges and limitations, we were able to  determine the status of the holding companies for 43 of the 57 ILCs,  limited-purpose credit card banks, municipal deposit banks, and trust  banks. Using the definition of commercial from the Dodd-Frank Act and  publicly available financial data, we determined that 11 exempt  institutions were owned by commercial companies and 32 by  noncommercial companies (see table 3). The status of the holding  companies of the remaining 14 institutions could not be determined  because of the lack of sufficiently detailed, publicly available financial  data about the companies or information from OCC or FDIC.
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.
section_title: Exempt Institutions’ Risk Profiles Vary
paragraphs: The risk profiles for exempt institutions vary, reflecting differences in the  institutions’ size, complexity, and level of banking and nonbanking  activities. While few of the exempt institutions are large depository  institutions that pose significant systemic risk to the financial system,  many engage in several types of banking and nonbanking activities that  carry a variety of risks. These risks exist at the depository institution and  holding company levels.
ILCs. The Federal Reserve and Treasury view these institutions as  full-service commercial banks and therefore view the risks they pose  as similar to those of commercial banks, including credit risk. The  FDIC concurs in this view and noted that many exempt institutions  primarily accept brokered deposits, considered to be riskier than  demand deposits because of concerns about liquidity risks.can provide a wide range of banking services and are able to make  loans (including credit card loans) and investments, like commercial  banks.
Limited-purpose credit card banks. These exempt institutions are  generally restricted to credit card lending activities and are not  permitted to conduct many banking activities, such as mortgage or  commercial lending. They are not permitted to accept demand deposits. The most dominant risks for these banks are compliance,  liquidity, reputational, and to some extent credit risk.
Municipal deposit banks and trust banks. These exempt institutions’  banking activities are limited. The sole purpose of municipal deposit  banks is to accept municipal deposits, and these banks do not make  commercial or consumer loans. Similarly, the three trust banks that  are exempt from the BHC Act function only in a fiduciary capacity and  do not pose the same types of financial risks as commercial banks.  Their risk profile is based on fiduciary responsibility and litigation risk.
S&Ls. These exempt institutions offer a range of banking services that  are similar to those provided by commercial banks, including offering  a variety of banking products, accepting demand deposits and making  commercial, real estate, and residential mortgage loans. Because  S&Ls are similar to commercial banks, they are exposed to credit,  liquidity, operational, reputational, and compliance risks. However, as  discussed, unlike the owners of other exempt institutions, S&L holding  companies are subject to supervision and regulation at the holding  company level, by the Federal Reserve.
In addition to their banking activities, commercial ownership of exempt  institutions could pose additional risks. Federal Reserve, FDIC and Treasury  officials each acknowledged the risk that a commercial holding company  may seek to operate an exempt financial institution for the holding  company’s own benefit. For example, ILCs and limited-purpose credit card  banks could be directed to engage in transactions that benefited the holding  company’s affiliates but were detrimental to the financial institutions’ safety  and soundness. To address adverse transactions between an insured  institution and its affiliates, Congress restricted the ability of insured  depository institutions, including exempt institutions, to enter into transactions  with affiliates. 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. 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.  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.
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. 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 limited- purpose credit card banks remained above 20 percent over the period. In  comparison, the average equity-to-total assets ratio of bank holding  companies with total assets of more than $500 million that were required  to file financial data with the Federal Reserve remained below 10 percent  during the same period.
Federal Reserve acknowledged that commercial holding companies may  be able to act as a source of strength for exempt institutions. However,  they expressed three concerns. First, Federal Reserve officials noted that  no federal regulator was assigned to look at the health of the entire  holding company for an exempt institution, other than for S&Ls, creating a  potential regulatory “blind spot.” The officials explained that a regulator  should have the authority to look at the entire organization and not at  what affects only the depository institutions. Second, holding companies  of ILCs are not held to the same risk management and capital standards  as bank holding companies, according to the officials. For example,  through consolidated supervision, the Federal Reserve assesses a bank  holding company’s risk management functions and its impact on the  depository institution. Third, regulators cannot take enforcement actions  to compel nonbank holding companies to serve as a source of strength  for the exempt institution.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.
section_title: Federal Regulation of Exempt Institutions Differs across Regulators, and Views on Regulatory Adequacy Are Mixed
paragraphs: 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.
subsections: section_title: Supervision of ILCs and Limited-Purpose Credit Card Banks Focuses on the Institutions’ Financial Condition
paragraphs: FDIC and OCC, which oversee ILCs, limited-purpose credit card banks,  and trust banks, are focused primarily on the safety and soundness of the  exempt institutions. To carry out its supervisory responsibilities, FDIC  generally conducts annual full-scope examinations of ILCs and state- chartered limited-purpose credit card banks jointly with the state  regulators and assigns each a CAMELS rating. OCC examines federally  chartered limited-purpose credit card banks every 12-18 months.
We reviewed a total of 18 examinations of exempt institutions with assets of $1 billion or  more that FDIC and OCC conducted in 2010 and 2011. We chose examinations of the  largest banks (by asset size) because these institutions represented a greater financial  risk. FDIC has statutory authority to examine any affiliate of a state nonmember bank  (including an ILC) as necessary to determine the relationship of that affiliate to the bank  and the effect of that relationship on the bank. 12 U.S.C. § 1820(b)(4).  Only one limited- purpose credit card bank that OCC supervised had assets of $1 billion or more, which was  one of our criteria for choosing examinations to review. Therefore, we judgmentally  selected six other examinations, selecting the most recent examinations. 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.
section_title: Oversight of S&Ls Is Evolving and Will Likely Differ from Previous Regulation
paragraphs: 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. The consolidated supervision program, which applies  primarily to large and regional bank holding companies, is aimed at  assessing and understanding the bank holding company on a  consolidated basis. In April 2011, the Federal Reserve issued a notice of  intent to provide information to the S&L holding companies on how it  plans to supervise them and to solicit feedback. The notice covered  consolidated supervision, the holding company rating system, capital  adequacy, and small noncomplex holding companies. 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. 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.
Federal Reserve officials also told us that the agency had organized S&L  holding companies into groups based on their size and nonbanking  activities for supervision purposes. Large, complex holding companies— those with $50 billion or more in assets—will be assigned permanent  onsite examination teams that will provide ongoing supervision. S&L  holding companies with assets of between $10 billion and $50 billion will  be assigned off-site examiners for monitoring that may not be continuous.  For S&L holding companies with assets of less than $10 billion, the  Federal Reserve will depend largely on the primary federal regulator— either OCC or FDIC—for the exempt S&Ls. S&Ls with less than $10  billion in assets generally consist only of the S&L and a holding company  and thus require less supervision at the holding company level, according  to an OCC official. Relying on the work of the primary federal regulator is  similar to the Federal Reserve’s approach to supervising small “shell”  bank holding companies. The primary federal bank regulator, either FDIC  or OCC, is responsible for examining the bank, and the Federal Reserve  reviews the holding company information, including financial data such as  the capital and liquidity levels and the quality of the risk management at  the holding company level.
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. 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.
A holding company can be organized in various ways. All holding companies have a  parent company, but the structure of the overall company may consist of a number of  intermediate holding companies, which in turn may hold other subsidiaries within the  company. For example, GE Money Bank is an S&L that is held directly by General Electric  Consumer Finance, Inc., an intermediate holding company, and the parent holding  company is General Electric Company.
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. 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.
section_title: Views on the Adequacy of Federal Regulation of Exempt Institutions Are Mixed
paragraphs: Representatives from the exempt financial institutions and an academic  told us that the current regulatory framework was sufficiently robust. They  noted that federal and state regulators were able to examine a wide  variety of issues through their examination process and minimize certain  risks, such as conflicts of interests between holding companies and their  exempt institution subsidiaries, through the examination processes.  Industry representatives also suggested that the low number of failures of  exempt institutions during the last several years spoke to the robust  oversight and strength of the holding company structures. According to  our analysis of financial data, no limited-purpose credit card banks and  two ILCs failed between 2007 and 2010, compared with hundreds of bank  failures.
OCC officials told us that they had sufficient authority to examine the  affiliates of national banks and could adequately examine the activities of  the affiliates that may affect the bank. OCC regulatory and supervisory  practices are the same regardless of whether the institution is owned by a  bank holding company or not, according to OCC officials. FDIC officials  believe that they can adequately supervise exempt institutions but  acknowledged the safety and soundness benefits of consolidated  supervision. FDIC officials told us that they tried to ensure that institutions  complied with all applicable laws and regulations and had sufficient  capital. If the parent company runs into trouble, FDIC imposes certain  controls through cease-and-desist orders or other enforcement measures  in order to insulate the insured depository institution from the failings of its  parent company. In 2005, we reported that consolidated supervision was  a recognized method of supervising an insured institution, its holding  company, and affiliates. We noted that while FDIC had developed an  alternative approach that it claimed has mitigated losses to the bank  insurance fund, it did not have some of the explicit authorities that other  consolidated supervisors possess, and its oversight over nonbank holding  companies may be disadvantaged by its lack of explicit authority to  supervise these entities, including companies that own large and complex  ILCs. In 2007, FDIC officials noted in testimony that the number, size  and types of commercial applicants had changed significantly causing the  FDIC to carefully examine this new environment. FDIC officials further  stated that these changes in ownership structures raise potential risks  that deserve further study and represent important public policy issues  that are most appropriately addressed by Congress.
Federal Reserve and Treasury officials contend that the exemptions  represent gaps in the current regulatory structure that pose risks to the  financial system. Federal Reserve and Treasury officials said while  exempt institutions have access to federal deposit insurance, most are  not subject to consolidated supervision. As discussed earlier, these  officials believe that the lack of consolidated supervision of institutions  that are federally insured represent a supervisory “blind spot” that should  be removed. In particular, no federal regulator of the exempt institutions,  excluding S&Ls that are part of holding companies, has the authority to  broadly review the holding company and the other nonbank subsidiaries  within the holding company structure. As a result, some of the potential  activities within the holding company that may affect the exempt  institution may be missed.
Treasury’s 2009 regulatory reform proposal attempted to address these  concerns by recommending that the exemptions to the BHC Act be  removed and that companies owning ILCs, credit card banks, and trust  banks become bank holding companies subject to Federal Reserve  consolidated supervision. 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. 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. 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.
section_title: Removing BHC Act Exemptions Could Have Varying Implications
subsections: section_title: Removing Exemptions Would Likely Lead to Divestment or Changes in Business Models for Many Holding Companies with Exempt Institutions
paragraphs: According to representatives from limited-purpose credit card banks and  ILCs, commercial holding companies would most likely divest themselves  of their exempt institutions if the BHC Act exemptions were removed. The  BHC Act restricts bank holding companies’ involvement in commercial  activities, among other things. Almost all representatives from exempt  institutions that are owned by commercial holding companies told us that  divestment was the likely outcome. For example, representatives of all  five limited-purpose credit card banks and five ILCs owned by commercial  holding companies that we spoke with told us that the parent companies  would most likely divest, sell, or liquidate themselves of the exempt  institutions. Several representatives from exempt institutions owned by  noncommercial holding companies that we spoke with also told us that  divestment was likely, although they identified other potential outcomes  compared to their counterparts with commercial ownership. For example,  three representatives from noncommercial ILCs that we interviewed told  us that the holding company could be converted to a bank holding  company, the ILC charter could be restructured, or the current business  model could be altered to comply with BHC Act requirements.  Representatives from one of the noncommercial companies we spoke  with stated that the holding company’s ability to compete against larger,  more diversified commercial banks would be reduced. Representatives  from grandfathered S&Ls owned by commercial companies similarly told  us their companies would likely divest themselves of the S&L if the  exemptions were removed.
Although the Federal Reserve now has the authority to require the  grandfathered unitary S&L holding companies to establish intermediate  holding companies, current law does not address this issue for the other  institutions that are exempt from the BHC Act. We asked representatives  from ILCs and credit card banks owned by both commercial and  noncommercial holding companies about establishing an intermediate  holding company as a potential strategy if the exemptions were removed.  Approximately half of the representatives from ILCs and limited-purpose  credit card banks whom we interviewed stated that they were either  uncertain about or opposed to the idea of an intermediate holding  company.  Some of the representatives that held this opinion argued that  an intermediate holding company structure would not improve the current  regulatory environment or foster greater safety and soundness within the  overall holding company. However, representatives from one limited- purpose credit card bank stated that an intermediate holding company  could potentially be a compromise. But they added that the utility of such  an option would depend on how the policy was implemented and which  financial activities were required to be conducted within the intermediate  holding company.
Representatives of exempt institutions also told us that divesting the  exempt institutions could have additional implications for the holding  companies, their customers, and their employees.
Changes in business models. Representatives from several ILCs and  limited purpose credit card banks we interviewed told us that their  exempt institution was an integral part of the parent holding  company’s business model. Specifically, they stated that the exempt  institutions were used to help extend credit or streamline customer  finance operations, lower lending or internal costs, or increase  customer loyalty. Furthermore for some representatives, divesting  their exempt institution would likely require changes in their business  models or could reduce revenues for the holding company. For  example, three ILCs that we spoke with indicated that divestment  would result in a decrease in the parent holding companies’ sales or  revenue. Similarly, four of the five limited-purpose credit card banks  we spoke with said that in order to continue offering credit without the  BHC Act exemptions, they would likely have to use a third-party credit  provider, such as one of the large banks that issue credit cards, and  would lose interest and late fee income.
Changes in customer relationships. Representatives from six ILCs  and two credit card banks indicated that losing the financial institution  could result in a significant loss of customers, damage customer  relations for the parent company, or both. Officials from one ILC  stated that if the holding company could no longer rely on the BHC  Act exemption and divested itself of its ILC, its current customers  would lose access to the revolving credit that the company issued  through the ILC. Furthermore, they said that the ability to offer credit  cards increased customer loyalty and provided an additional credit  option for customers. Officials from a limited-purpose credit card bank  reported to us that owning a financial institution allowed the holding  company to retain control of the customer experience over the entire  life cycle of the transaction, from marketing to customer service and  collection.
Increased costs of operations. Representatives from five ILCs and  one credit card bank told us that losing the exemptions could increase  costs. That is, if the parent companies divested themselves of their  financial institutions, the parent companies’ operating or internal costs  could rise because of increased administrative costs—for example,  from having to use third-party credit providers. Another group of  representatives told us that the ILC charter allowed the institution to  market its products nationally from the state of Utah, reducing  operational costs.
Job losses. Representatives from two exempt institutions told us that  if the BHC Act exemptions were removed and the parent company  divested itself of the exempt institution, job losses would be likely at  the both the financial institution and holding company levels.
Additionally, representatives from municipal deposit banks told us that  their holding companies would most likely decide to divest themselves of  their municipal deposit banks if the exemptions to the BHC Act were  removed. Representatives of the one trust bank we interviewed told us  that its parent company would likely divest itself of the insured deposits— primarily certificates of deposit—if the exemption for trust banks was  removed. According to the officials of the trust bank, the insured deposits  and the depository institution were a small part of their overall business,  and they would be able to carry out their trust functions without the  insured deposits. They said that they primarily maintained the insured  depository institution because it had been a part of the organization for  historical reasons.
section_title: Removing the Exemptions Would Likely Have a Limited Impact on the Overall Credit Market and Would Not Increase Concentration in Most Credit Markets
subsections: section_title: Market Shares for Exempt Institutions Limit Potential Impact on Overall Credit Market of Removing Exemptions
paragraphs: 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. 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.
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.
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. 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). 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.
If the exemptions were removed, some exempt institutions might exit the  credit market and stop making loans. As previously discussed,  representatives from some ILCs and limited-purpose credit card banks  owned by commercial parent companies indicated that their parent  companies would likely divest themselves of their exempt institutions if  the exemptions were removed. To estimate the effect of the divestment of  grandfathered S&Ls owned by commercial companies, we estimated the  change in the HHI for each loan market in alternative scenarios in which  all grandfathered S&Ls, all ILCs, or all limited-purpose credit card banks  ceased making loans and transferred the loans on their balance sheets to  the firms remaining in the market. 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. The  estimated changes in the HHIs indicated that the overall loan market was  unlikely to become concentrated in any of these scenarios. Even in the  event that all grandfathered S&Ls, all ILCs, or all limited-purpose credit  card banks exited the credit market, the remaining firms would still have  little market power and thus little ability to increase loan prices or reduce  the quantity of loans available. In every market we analyzed, except credit  card loans, estimated changes in the HHIs indicated that these markets  were also unlikely to become concentrated in similar scenarios. However,  our definition of the market excludes other providers of credit, including  uninsured affiliates of FDIC-insured institutions, finance companies, credit  unions, and other institutions that are not FDIC-insured. Our estimates  may be either overstated or understated, depending on the number and  sizes of the credit providers we excluded.
Although available data suggest a degree of concentration in the credit  card loan segment, the likely impact of removing the exemptions on this  market varies across institution types. We found that the HHI for the  market for credit card loans in 2010 was close to the threshold for  moderate concentration. However, under current conditions, estimated  changes in the HHI were small—less than 100—in scenarios in which all  ILCs or all limited-purpose credit card banks ceased making loans and  transferred their portfolios to other FDIC-insured institutions. Removing  the exemptions for these institutions would likely not lead to significant  increases in market power in the credit card loan market. In contrast, the  HHI for the credit card loan market increased by more than 100 in  scenarios in which grandfathered S&Ls ceased making credit card loans  and transferred their portfolios to other FDIC-insured institutions. In these  scenarios, the increase in concentration in the credit card loan market  could be large enough to significantly increase market power for some of  the remaining firms and might lead to price increases or reductions in  availability of credit card loans. Once again, this definition of the market  excludes other providers of credit, including uninsured affiliates of FDIC- insured institutions, finance companies, credit unions, and other  institutions that are not FDIC-insured. Our estimates may be either  overstated or understated, depending on the number and sizes of the  credit providers we excluded.
Some representatives of exempt institutions also expressed concern that  removing the exemptions could increase concentration in the market for  credit card loans and reduce the availability of credit in certain niche  markets. Representatives from five limited purpose credit card banks and  several ILCs and their parent companies reported that if the exemptions  were removed, the parent company would most likely divest itself of the  credit card bank or ILC rather than convert to a bank holding company.  As a result of divestment, some stated that their credit portfolios would  most likely be acquired by large credit card issuers or banks, argued that  divestment BHC Act exempt institutions could potentially increase credit  market concentration, or restrict access to credit for some customers.   Two exempt institutions said that credit to borrowers with limited access  to general purpose credit would be affected.
Representatives from several ILCs and two credit card banks also told us  that they made a significant proportion of loans in niche markets, including  student loans, small business loans, and vehicle and equipment loans and  leases to businesses and consumers involved in activities such as  specialized retail sales, insurance, transportation services, and taxi cab  operations. Representatives from 3 exempt institutions and their parent  companies also indicated that they offered specific credit products that  commercial banks did not offer and served customers that commercial  banks typically did not serve.  One large credit card issuer told us that it  had developed cobranded credit card arrangements for certain businesses,  such as a small customer machinery tool manufacturer, and designed  programs to serve a particular demographic for a particular retailer. This  credit card issuer told us that it had invested substantial resources in  developing a user friendly, secure, and reliable nationwide structure  customized to a particular group in order to win cobranding relationships  with retailers in niche markets. However, one academic we spoke with said  that traditional banks and other lenders would likely not expand into niche  consumer credit markets, because these institutions lacked the market  expertise of such credit card banks and ILCs. The lack of data on activity in  niche markets prevented us from measuring concentration and estimating  potential changes to it in scenarios in which exempt institutions ceased to  make loans. Representatives from some exempt institutions also  expressed concerns about the availability of credit to certain niche markets  if the exemptions were removed.
Federal Reserve officials told us that they believed that credit would  continue to be available to creditworthy customers, even if the  exemptions were removed and some institutions no longer provided  credit. When we discussed the issue of credit availability in niche markets  with the Federal Reserve, an official explained that the agency generally  used FDIC’s Call Report data to analyze credit markets and that the  reports did not include data on niche credit markets. Although Federal  Reserve officials acknowledged that removing the exemptions for credit  card banks and ILCs could affect the price and quantity of credit available  in some niche markets in which those institutions operated, they expected  that other financial institutions would step in and make credit available to  qualified borrowers at prices determined by the market. The officials  stated that they had not seen any data supporting the idea that exempt  institutions offered better terms than commercial banks. Moreover, they  stated that companies that currently owned exempt institutions could  continue to provide credit to their customers through institutions without  insured deposits, such as finance companies, which are not permitted to  have insured deposits. One example of this type of nonbank finance  company is the Ford Motor Credit Company, a wholly owned subsidiary of  the Ford Motor Company that finances Ford automobiles and supports  Ford dealers but does not accept FDIC-insured deposits.
section_title: Views Varied on How Removing the Exemptions Would Impact Institutions’ Safety and Soundness and Financial System Stability
paragraphs: Representatives from three exempt institutions stated that if the  exemptions were removed, they would see no additional improvement in  safety and soundness. Other exempt institution representatives explained  that they did not consider consolidated supervision a stronger model than  the FDIC and state regulator model for exempt institutions. In addition to  not improving safety and soundness, some representatives from exempt  institutions stated that removing the exemptions would likely result in  further credit market concentration.  For example, representatives from a  limited-purpose credit card bank noted that their share of the market  would likely be absorbed by large credit card issuers as their holding  company would likely divest their institution if the exemptions were  removed.
OCC officials have not expressed concerns about the sufficiency of the  current oversight of exempt institutions and FDIC officials acknowledged  the safety and soundness benefits of consolidated supervision. Federal  Reserve and Treasury officials maintained that the safety and soundness  of exempt institutions would be improved if the BHC Act exemptions were  removed because exempt institutions—and their holding companies— would be subject to consolidated supervision. Consolidated supervision  allows regulators to understand an organization’s structure, activities,  resources, and risks, and to address financial, managerial, operational, or  other deficiencies before they pose a danger to subsidiary depository  institutions. However, Federal Reserve officials acknowledged that  consolidated supervision needed to be improved in light of the financial  problems experienced by several bank holding companies during the  2007-2009 financial crisis but noted that they had learned many lessons  from the crisis. For example, according to the Federal Reserve officials,  regulated institutions, particularly large U.S. banking organizations, had  complained to federal banking regulators, including the Federal Reserve,  about unregulated entities taking over more of their business. Their  concerns and influence contributed to a less than a rigorous application of  safety and soundness standards by federal regulators, which was one of  the causes for the recent financial crisis. Representatives from a former  ILC holding company that became a bank holding company agreed with  the Federal Reserve and Treasury’s view on the merits of subjecting  exempt institutions to consolidated supervision, noting, for example, that  their holding company was now required to implement more robust risk  management systems than it had previously maintained.
Federal Reserve officials also stated that financial system stability would  improve if the exemptions from the BHC Act were removed. They noted  that the risk posed by the exempt institutions should not be discounted  based on their relative size and small number of the institutions, as the  size and number of the institutions could change in the future. For  example, Federal Reserve officials told us that if the exemption were not  removed and the Dodd-Frank moratorium expired, the number and size of  ILCs could grow to the much higher levels that they had reached prior to  the financial crisis. Furthermore, Federal Reserve officials noted that  maintaining these exemptions resulted in differing regulatory oversight,  raising questions about whether the exemptions provide an unfair  competitive advantage. For example, holding companies of exempt  institutions (aside from S&L holding companies) are not subject to the  same level of scrutiny as bank holding companies—despite enjoying the  benefits of being FDIC insured. Federal Reserve officials also cited other  potential competitive concerns introduced by maintaining the exemptions.  For example, a large company that owns an exempt insured depository  institution could direct that institution to (unfairly) deny credit to the parent  company’s competitors. Moreover, the parent company could encourage  the affiliated exempt insured depository institution to offer loans to the  company’s customers based on terms not offered to its competitor’s  customers.
The impact of removing the exemption and addressing risks posed by  exempt institutions varies. For example, the Dodd-Frank Act requires the  holding companies for S&Ls, which are by far the largest in number and  size, to be supervised by the Federal Reserve.  S&L holding companies  will be subject to capital requirements and other regulatory requirements  similar to those applicable to bank holding companies. In contrast, the  other exempt institutions are few in number and size, but their holding  companies are not subject to Federal Reserve’s supervision. In addition,  the banking activities of the exempt institutions vary—for example, ILCs  conduct activities similar to those of full-service commercial banks and  limited-purpose credit card banks conduct few banking activities—and  these activities carry different risks. The moratorium on approving federal  deposit insurance for ILCs, credit card banks, and trust banks is set to  expire in 2013. Federal Reserve officials told us that they plan to continue  to watch changes in the number or size of exempt institutions, as they  have previously, consistent with their position that the exemptions  represent gaps in the regulatory structure which may pose risks to the  financial system. They also said they would bring forward any concerns  about exempt institutions which may pose a risk to financial system  stability to FSOC. Ultimately, the decision to remove the BHC Act  exemptions is a policy decision that involves trade-offs among a number  of competing considerations, including potentially increasing  concentration in certain credit markets and decreasing consumer choice  and the availability of credit in certain regions and credit markets and  addressing existing regulatory gaps and potential competitive impacts.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
subsections: section_title: Number of Institutions and General Characteristics
paragraphs: To determine the extent to which certain financial institutions were  exempt from the BHC Act, we requested data from Federal Deposit  Insurance Corporation (FDIC), Board of Governors for the Federal  Reserve System (Federal Reserve), Office of the Comptroller of the  Currency (OCC), and the Office of Thrift Supervision (OTS) relating to the  number of exempt institutions, their geographic location, their asset size,  and the parent holding company. We also interviewed officials from the  FDIC and OCC to obtain their understanding of the exemptions listed in  the BHC Act. Once we established the type of institutions that were  exempted from the BHC Act, we collected data from the FDIC, Federal  Reserve, and OCC on these institutions from 2006 through 2010. The  data included: asset size, geographic location, and primary federal  regulators. We also interviewed the state banking departments of  California, Nevada, New York, and Utah to collect information on the  industrial loan companies (ILC) and municipal deposit banks, which are  exempt from the definition of bank under the BHC Act and are state- chartered institutions. We tested the reliability of the data provided to us  by the federal banking regulators and determined it to be sufficiently  reliable for our purposes. To do this, we interviewed the regulators on  how they identified institutions that were exempt from the BHC Act and  what process they used to identify the institutions and then compared the  lists from the federal banking regulators. As part of this comparison, we  looked for any duplicates or inconsistency between the regulators.
To determine whether ILCs, limited-purpose credit card banks, municipal  deposit banks, and trust banks were owned by commercial holding  companies, we reviewed information from the federal bank regulators on  the holding companies of the exempt institutions and analyzed public  information, if available, on the holding companies to identify the business  segments of the company. The types of publicly available information that  we examined included Securities and Exchange Commission’s (SEC)  filings and company annual reports.  Using this information, we identified  the annual gross revenue and the business segments that created the  revenue. Using the activities listed in Section 4 (k) of the BHC Act, we  compared the activities of the holding company listed in the public  documents to identify the activities considered financial in nature and then  determined the extent to which their 2010 annual gross revenue was  produced by financial activities. In accordance with the Dodd-Frank Wall  Street Reform and Consumer Protection Act, if 15 percent or more of a  company’s activities were financial, we classified it as noncommercial.  Companies that derived less than 15 percent of their revenue from  financial activities were classified as commercial.
section_title: Federal Regulatory System
paragraphs: To describe the federal regulatory system for the exempt financial  institutions, we reviewed 18 examinations of exempt institutions with  assets of $1 billion or more that FDIC and OCC conducted in 2009 and  2010. We selected examinations for review based on the institutions’  asset size, choosing larger institutions because of the potential risks they  posed. The examinations we reviewed included 11 ILCs and 7 limited- purpose credit card banks. Of the OCC-supervised limited-purpose credit  card banks, only one institution met our criteria so we reviewed the most  recent examinations of the OCC-supervised limited-purpose credit card  banks. Our review of examinations did not include trust banks and  municipal deposit banks because their asset sizes were much lower than  $1 billion. We focused on the larger institutions because we determined  that the regulators generally dedicated more resources to them, such as  placing examiners onsite and concluded that if certain supervisory  practices are not taken on the larger institutions, then they would not  likely be implemented for the smaller institutions. We reviewed  documentation from FDIC, the Federal Reserve, and OCC about their  supervision practices, including information from both OCC and the  Federal Reserve on how they plan to carry out their new responsibilities  for savings and loans (S&L) and their holding companies. We interviewed  officials from FDIC, the Federal Reserve, OCC, and OTS regarding the  supervision of all BHC Act exempt institutions, including S&L and holding  company supervision and an academic who recently completed a study  on ILCs for a think tank organization.
section_title: Implications of Removing Exemptions
paragraphs: 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. We obtained lists of  FDIC-insured institutions from the Summary of Deposits (SOD) data  available on FDIC’s website. We obtained balance sheet data from each  institution’s Call Report or Thrift Financial Report from SNL Financial, a  financial industry database. Some institutions indicated that they were  subsidiaries of other institutions in the data and that their parent institution  reports consolidated balance sheet data for both institutions on the parent  institution’s balance sheet. In these cases, we removed the subsidiary  institution from the sample in these cases to avoid double-counting them.
We identified seven groups of institutions: (1) commercial banks and all  subsidiaries of bank holding companies, (2) limited-purpose credit card  banks, (3) ILCs, (4) municipal deposit banks, (5) trust banks, (6) S&Ls  that are subsidiaries of grandfathered unitary savings and loan holding  companies (“grandfathered S&Ls”), and (7) other S&Ls. All institutions  that are subsidiaries of bank holding companies are in the first group. The  two groups of S&Ls are distinguished by the types of holding companies  of which they are subsidiaries. Prior to the enactment of the Gramm- Leach-Bliley Act (GLBA) in 1999, unitary S&L holding companies could  generally operate without activity restrictions. GLBA restricted companies  that filed applications to acquire an S&L after May 4, 1999, to only  engage in activities permissible for S&L holding companies. Existing  unitary S&L holding companies were “grandfathered” and could continue  to engage in any type of financial or commercial activities. Thus, some  S&Ls are subsidiaries of grandfathered unitary S&L holding companies  that are not subject to activity restrictions, while other S&Ls are either  subsidiaries of holding companies that are subject to activity restrictions  or are not subsidiaries of holding companies.
We obtained lists of limited-purpose credit card banks, ILCs, municipal  deposit banks, and trust banks as of September 30, 2010, or December  31, 2010, from FDIC, the Federal Reserve, and OCC. We then used  institution histories obtained from FDIC’s Bank Find website (Bank Find)  to adjust those lists to reflect institutions’ types as of June 30, 2010. We  used FDIC’s SOD data to identify S&Ls. To further identify grandfathered  S&Ls, we obtained a list of grandfathered unitary S&L holding companies  and their subsidiaries as of December 31, 2010, from OTS. Because the  unitary S&L holding companies were grandfathered in 1999, the savings  and loans that were their subsidiaries as of December 31, 2010, must  also have been their subsidiaries as of June 30, 2010. That is, an S&L  could not have become a subsidiary of a grandfathered unitary S&L  holding company between June 30, 2010, and December 31, 2010.  Finally, we used FDIC’s SOD data to identify commercial banks and all  institutions that are subsidiaries of bank holding companies. All  institutions that are subsidiaries of bank holding companies—including  limited-purpose credit card banks, ILCs, municipal deposit banks, S&Ls,  and trust banks—are put in the group containing commercial banks and  bank holding company subsidiaries.
We estimated each group’s share of the market for various types of loans,  including total loans and leases; construction and land development  loans; residential mortgage loans, multifamily, commercial, and  agricultural real estate loans; commercial, industrial, and agricultural  production loans; credit card loans; consumer loans other than credit card  loans; and leases. A group’s market share is equal to the total dollar  value of loans on the balance sheets of all institutions in the group as a  percent of the total dollar value of loans on the balance sheets of all  institutions in the market.
To assess the extent to which the price of credit and the quantity of credit  available are likely to be affected if the exemptions are removed, we  calculated the Herfindahl-Hirschman Index (HHI) of market concentration  in loan markets. The HHI is a key statistical indicator used to assess the  market concentration and the potential for firms to exercise market power.  The HHI reflects the number of firms in the market and each firm’s market  share, and it is calculated by summing the squares of the market shares  of each firm in the market. For example, a market consisting of four firms  with market shares of 30 percent, 30 percent, 20 percent, and 20 percent  has an HHI of 2,600 (900 + 900 + 400 + 400 = 2600). The HHI ranges  from 10,000 (if there is a single firm in the market) to a number  approaching zero (in the case of a perfectly competitive market). That is,  higher values of the HHI indicate a more concentrated market.  Department of Justice and Federal Trade Commission guidelines as of  August 19, 2010, suggest that an HHI between 0 and 1,500 indicates that  a market is not concentrated, an HHI between 1,500 and 2,500 indicates  that a market is moderately concentrated, and an HHI greater than 2,500  indicates that a market is highly concentrated, although other factors also  play a role in determining market concentration.
To calculate HHIs, we defined a firm as the collection of all FDIC-insured  institutions that are subsidiaries of the same parent company (for  institutions that are subsidiaries of parent companies) or the institution  itself (for institutions that are not subsidiaries of parent companies).  Parent companies of FDIC-insured institutions are either bank holding  companies, S&L holding companies, or other parent companies. We  identified bank holding company parents and all their subsidiaries for  each year using FDIC’s SOD data. We obtained lists of S&L holding  company parents and their OTS-regulated subsidiaries from OTS. Based  on data for 2011, we assumed that each savings bank that is not a  subsidiary of a bank holding company is either a standalone institution  without a parent company or is the only FDIC-insured subsidiary of its  parent holding company. We obtained data on other parent companies— the nonbank holding company, non-S&L holding company parent  companies of some credit card banks, industrial loan companies, and  trust banks—for 2010 from FDIC and OCC. A limitation of this strategy is  that we may not have identified all the institutions that belong to the same  other parent company. As a result, our HHIs may understate the amount  of concentration in the market.
We calculated the HHI for the markets for various types of loans,  including total loans and leases; construction and land development  loans; residential mortgage loans; multifamily, commercial, and  agricultural real estate loans; commercial, industrial, and agricultural  production loans; credit card loans; consumer loans other than credit card  loans; and leases. We first calculated each firm’s market share as the  total dollar value of loans on the balance sheets of all institutions in the  firm as a percent of the total dollar value of loans on the balance sheets  of all institutions in the market. We then summed the squared market  shares of every firm in the market to obtain the HHI for that market.
For groups composed of grandfathered S&Ls (part of a unitary S&L  holding company), ILCs, and limited-purpose credit card banks, we  estimated the change in the HHI for each loan market in alternative  scenarios in which each group of exempt institutions ceases to make  loans and transfers the loans on its balance sheets among firms in the  market. In the first scenario, we assumed that the exiting institutions’  loans are distributed proportionally among remaining firms. In the second  scenario, we assumed that the exiting institutions’ loans are acquired by  the largest firm remaining in the market.
A limitation of including only FDIC-insured institutions in our market share  and HHI calculations is that we exclude many institutions that do not have  FDIC insurance but that provide credit, such as uninsured affiliates of  FDIC-insured institutions, credit unions, and finance companies. Capital  markets are another source of funds. Thus, our calculations may  overstate exempt institutions’ share of loan markets. Furthermore, our  calculations may either overstate or understate the amount of  concentration in loan markets, depending on the numbers and sizes of  the firms we are excluding.
Our analysis implicitly assumes loan markets are national markets, that  is, that credit provided by an institution is available to any potential  borrower, regardless of their respective geographic locations. We make  this assumption because subnational loan data are not readily available.  If loan markets are not national in scope, then our market share and  market concentration estimates are unlikely to represent those that we  would estimate for a specific subnational geographic region, such as a  state or metropolitan area. The market share and market concentration  estimates for some regions would likely be greater than our national  estimates, while others would likely be lower.
We assessed the reliability of all of the data used to determine the  potential implications of removing the exemptions and found that the data  were sufficiently reliable for our purposes. To do this, we interviewed the  regulators on how they identified institutions that were exempt from the  BHC Act and what process they used to identify the institutions and then  compared the lists from the federal banking regulators.
In addition to these quantitative analyses, we interviewed representatives  from 31 exempt institutions and representatives from the American  Bankers Association and the Independent Community Bankers  Association to learn more about their views regarding the BHC Act  exemptions and possible implications of the institutions losing their  exempt status. In addition, we interviewed representatives from two ILC  holding companies that recently became bank holding companies to  obtain their views on bank holding company supervision from the  perspective of a former ILC holding company. We selected the institutions  for interview based primarily on the size of the exemption institutions and  the commercial status of the holding company. We attempted to interview  the largest institutions and those which were held by holding companies  that would be considered commercial. We conducted a content analysis  of the qualitative information that we obtained from these interviews to  identify themes that emerged. We also interviewed FDIC, Federal  Reserve, OCC and Department of the Treasury officials to obtain their  views on the implications of removal the exemptions. In addition, we  interviewed three commercial banks, which are large credit card issuers,  to collect additional information on potential concentration in credit card  issuing if the exemptions were removed.
We conducted this performance audit between October 2010 and  January 2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Financial Institutions Exempt under the Bank Holding Company Act and the Holding Company Commercial Status
paragraphs: 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.
subsections: section_title: Industrial Loans Corporations
paragraphs: 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).
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).
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.
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).
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.