SIC 6712 Offices of Bank Holding Companies
SIC 6712
Offices of bank holding companies are primarily engaged in holding or owning the securities of banks for the sole purpose of exercising partial or complete control over the activities of those organizations. Companies holding securities of banks, but which are predominantly operating the banks, are classified according to the kind of bank operated.
551111
Offices of Bank Holding Companies
Holding companies played a relatively minor role in the U.S. banking industry throughout most of the twentieth century. However, in 1999 Congress passed the Gramm-Leach-Bliley Act, which greatly expanded banks' field of play by creating financial holding companies (FHC), which can engage in activities other than banking as long as they are financial in nature. As a result, many major bank holding companies elected to become FHCs and expanded into such areas as securities and insurance underwriting. Although only about 12 percent of bank holding companies elected to become FHCs, in the mid-2000s, the top ten bank holding companies all held FHC status, and FHCs controlled more than 75 percent of bank holding company assets. At the end of 2004, 474 bank holding companies qualified as FHCs.
At the end of 2004 the Federal Reserve reported a total of 5,863 bank holding companies in operation, which controlled 6,235 insured commercial banks and held about 96 percent of all commercial bank assets. FHCs numbered 600 domestic firms and 36 foreign firms. Of domestic FHCs, 34 had assets in excess of $15 billion; 110 had assets between $1 billion and $15 billion; 82 had assets between $500 million and $1 billion; and 374 had assets less than $500 million. During 2004 a total of 47 domestic bank holding companies applied for and received FHC status.
Bank holding companies took advantage of their size and invested in new lines of business, expanded nationally, and increased income from service fees. They also relied on favorable legislation, implementation of new technology, and foreign markets to increase profits. Online banking influenced the industry, allowing customers new and quick access to markets. During the 2000s, the line between banking services and investment services was substantially blurred as banks became increasingly involved in investment-related activities.
Bank holding companies are essentially corporations whose assets are comprised of controlling shares of stock in one or more banks. The two principal types of companies are "one-bank" and "multibank" holding companies, which together encompass nearly all large banks. Although the majority of bank holding companies in the United States are classified as "one-bank" holding companies, most of these companies were organized to directly operate a bank, and are not, therefore, included in the bank holding company industry. The multibank corporations that make up the industry exercise varying degrees of control over the subsidiaries they own.
MBHCs earn money by increasing the scope, diversity, and efficiency of banks and bank branches. Banks and their branches, in turn, earn money by paying interest at rates lower than that charged on loans. Banks also generate revenue from such services as asset management, investment sales, and mortgage loan maintenance. Because of regulatory constraints, banks not associated with holding companies must operate under restrictions that often put them at a disadvantage compared to other financial institutions.
To overcome regulatory restraints, banks often use holding companies to circumvent legal restrictions and to raise capital by otherwise unavailable means. For instance, many banks can indirectly operate branches in other states by organizing their entity as a holding company. Banks are also able to enter, and often effectively compete in, related industries through holding company subsidiaries. In addition, holding companies are able to raise capital using methods that banks are restricted from practicing, such as issuing commercial paper.
Another important advantage that MBHCs have over individual banks is economies of scale. Many subsidiary banks benefit from operational efficiencies such as centralized and computerized bookkeeping, auditing, advertising, marketing, purchasing of supplies, research, personnel recruitment, group insurance and retirement programs, tax guidance, investment counseling, and other advisory services. In addition to greater access to capital, holding companies also facilitate mobility of money among their subsidiaries and allow them to spread gains and losses over all members of the holding corporation.
MBHCs first appeared in the United States around 1900, when they were used to develop banking networks that were otherwise prohibited by law and custom. Most of the organizations were relatively small Midwestern operations. During the 1920s and 1930s the number of holding corporations increased as the population shifted to urban areas and rural banks sought to pool their resources. At the same time, banks in the Midwest, West, and South increased the use of holding companies to combat the threat of eastern and western banks that were expanding nationally. By 1929 bank holding companies and a few chains that resembled holding companies controlled about 8 percent, or 2,103, of all U.S. banks. They also held more than 12 percent, or $11 billion, of all loans and investments.
After the Great Depression, the banking and bank holding industries came under intense scrutiny. Initially, the federal government regulated both industries in an effort to create a division between banking and investment activities. Later, however, regulations were used to influence the competitive structure of financial markets. In general, regulatory measures that shaped banking activities were responses to financial crises rather than the result of constructive economic planning.
Loose government regulation of holding banks ended with the Banking Act of 1933. In response to thousands of bank failures during the Great Depression, this act led to increased legislation between 1930 and 1960 that limited bank holding activity and expansion. The Bank Holding Company Act of 1956 required bank holding companies to refrain from all nonbanking related operations. It also required companies to seek state permission before acquiring banks in other states. In 1956 a total of 53 MBHCs represented 428 banks with 783 branches that controlled about $14.8 billion in deposits. By 1965 the number of companies participating in the industry remained at 53, although total deposit assets had nearly doubled to $27.5 billion.
Prompted by the Federal Reserve Board, Congress enacted laws in 1966 that were designed to revive the bank holding industry by eliminating many of the restrictions enacted in 1933. These laws resulted in favorable tax provisions as well as massive industry growth between 1965 and 1970. During this period, the number of MBHCs rose to 121 and deposits in holding company banks skyrocketed to more than $78 billion, or 16.2 percent of all U.S. bank deposits.
In 1970 new legislation was enacted that established a list of permissible activities in which holding companies could participate. One facet of these amendments to the 1956 act gave multibank companies an avenue for significantly broadening their operations. It allowed industry participants to operate nonbanking subsidiaries across state lines even though those subsidiaries engaged in some of the prescribed bank related activities. The result was that by 1974 about 275 MBHCs controlled approximately $359 billion in assets.
Before the 1970s, most bank holding companies were competing against organizations within the banking industry, all of which were subject to the same legal restrictions. However, the dynamics of banking began to change in the 1970s in three principal ways that had a profound effect on the multibank holding industry as monetary policy shifted, new industries and products competed for traditional banking dollars, and new technology changed the way banks conducted business.
The shift in monetary policy was partly a result of failed regulatory policies of the 1950s and 1970s. Because the government limited rates that banks could pay depositors, banks were placed at a competitive disadvantage in relation to government securities and instruments offered by financial institutions. New investment vehicles that offered higher rates than bank deposits, such as Merrill Lynch's Cash Management Account, began acquiring deposits that would have been made to banks.
Certificates of deposit became a popular way for banks to attract more money, though at a higher cost. As the cost of money increased for banks, profit margins narrowed. To offset increased costs, banks were forced to charge higher interest rates on loans, which meant that they were assuming more risk. Furthermore, in 1979 the Federal Reserve reacted to rising inflation rates by keeping the money supply stable and allowing interest rates to vary. The net result of this move was that many banks experienced higher costs of money, or deposits, than they could earn on their loans.
The 1980s were a time of rapid foreign expansion for the U.S. and foreign banking...
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