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. 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. 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.