A Unified Federal Charter for Banks and Savings Associations
A Staff Study
This article addresses the issues concerning the proposal to establish
a single federal charter for banks and savings associations. It is an FDIC
staff study and was originally published by the FDIC in October of 1996.
Following the introduction, the differences in the powers of banking organizations
and thrift organizations are summarized, and data are presented on the
various categories of organizations. The next section reviews the arguments
and evidence for and against a unification of the federal charters for
depository institutions. The final section assumes the decision is to unify
the charters and considers the issues that would then have to be resolved.
It should be noted from the start, this review does not include the possible
expansion of powers beyond those currently exercised by either the banking
or thrift industries. Rather, the review is limited to powers that one
or the other of the two industries currently possess.
The analysis contained in this study flowed from seven broad principles.
Any prospective change needed to:
strengthen the safety and soundness of the deposit insurance system and
the depository institutions within the system;
strengthen the efficiency and competitiveness of the U.S. banking system
in financial markets;
support reliance on market-based incentives to guide depository institution
choices on strategies and business activities for meeting customer needs;
reduce the current regulatory burdens and supervisory costs on insured
institutions and/or the customers of those institutions;
provide flexibility for insured institutions to respond to changes in market
conditions, technology, and customer financial needs;
increase depository institutions’ efficiency and/or effectiveness in meeting
specific, legislated, public-policy goals; and
increase public access to banking services.
Major Differences Between Federal Savings Associations and National Banks
Federally chartered depository institutions insured by the Federal Deposit
Insurance Corporation (FDIC) consist of federal savings associations,1
which are regulated by the Office of Thrift Supervision (OTS), and national
banks, which are regulated by the Office of the Comptroller of the Currency
(OCC). Their respective holding companies are savings-and-loan holding
companies, which are under the jurisdiction of the OTS, and bank holding
companies, which are regulated by the Federal Reserve Board (FRB).
Federal savings associations have historically enjoyed four distinct advantages
not accorded national banks. These advantages were: (1) preferential taxation; (2)
the most liberal branching rights of all federal depository institutions;
(3) expanded subsidiary powers; and (4) virtually unlimited holding company
activities. However, the magnitude of these thrift advantages has dissipated
over time, and with enactment of the Small Business Job Protection Act
on August 20, 1996, the preferential tax treatment for thrifts has been
Balanced against the historical benefits accruing to federal savings associations,
national banks have enjoyed the ability to engage in a much wider range
of lending activities. National banks were subject neither to an enforced
orientation toward a particular area, such as real-estate financing, nor
to specific asset-type lending constraints. National banks may focus on
a particular area of lending and investment if they desire, but they are
not forced to.
This section explores the major areas where savings associations and national
banks are treated differently. (For a more detailed comparison of their
differences, a table prepared by the OCC and the OTS can be made available
upon request from the Division of Research and Statistics of the FDIC).
Federal savings associations2 perform a similar financial intermediation
function to that of commercial banks. However, savings-and-loan associations
have a distinct focus from that of banks—the provision of home mortgage
credit. The laws promulgated by Congress for the industry in the 1930s
were motivated by a national policy to encourage home ownership, and this
has remained the special focus of the thrift industry since that time.3
Federal savings associations are subject to several specific lending constraints.
These constraints were also relaxed by the recent legislation. In general,
loans secured by nonresidential real estate may not exceed 400 percent
of capital. Commercial loans may not exceed 20 percent of assets, and amounts
in excess of 10 percent must be used for small-business loans. Unsecured
residential construction loans may not exceed the greater of 5 percent
of assets or 100 percent of capital. In combination, consumer loans, commercial
paper and corporate debt securities may not exceed 35 percent of assets.
In order to receive many of the special benefits of a thrift, an institution
must pass the qualified thrift lender (QTL) test, which requires that at
least 65 percent of an institution’s portfolio assets be qualified thrift
investments, primarily residential mortgages and related investments. The
Economic Growth and Regulatory Paper Reduction Act of 1996, enacted on
September 30, 1996, somewhat relaxed the QTL test by expanding the list
of qualified investments to include small-business-loans, and by increasing
the amount of consumer-oriented loans that can be counted as qualifying
assets. It also provided that an institution that qualifies as a domestic
building-and-loan under the Internal Revenue Code is considered a qualified
thrift lender. (See footnote four.)
Failure to meet the QTL test has several consequences. Probably the most
significant is that a holding company owning a nonqualifying savings institution
is required to register as a bank holding company. The activities of bank
holding companies are significantly more limited than are the activities
of most savings-and-loan holding companies. A later section of this report
summarizes the differences in powers of bank and savings-and-loan holding
companies. Other consequences of failure to meet the QTL test are restricted
access to Federal Home Loan Bank (FHLB) financing and accelerated repayment
of outstanding FHLB advances.
At the end of 1995, 98 percent of 1,437 savings associations met the QTL
test. (As stated above, the test has since been relaxed.) The greatest
level of profitability of institutions meeting the test, an ROA of 1.22
percent for the group, was achieved by institutions with QTL assets in
the range of 65 to 75 percent of portfolio assets (see Table 1). Six percent
of commercial banks appeared to have asset portfolios that would meet the
QTL test. The ROA of the 410 banks with QTL assets in the range of 65 to
75 percent of portfolio assets was 1.16 percent, which was almost the same
as the ROA for all banks, 1.17 percent.
Data as of December 31, 1995
QTL Test Compliance Distribution
Return on Assets
Range of QTL Ratio
Below 55 percent
Over 95 percent
Data as of December 31, 1995
QTL Test Compliance Distribution
Return on Assets
Range of QTL Ratio
Below 55 percent
Over 95 percent
Source: Division of Research and Statistics, FDIC
As mentioned previously, the repeal of the thrift tax advantage became
law on August 20, 1996. Prior to this date, Section 593 of the Internal
Revenue Code (IRC) of 1986 permitted thrifts that met the definition of
a domestic building-and-loan association4 to claim deductions for additions
to a bad-debt reserve, and to use either the percentage-of-income method
or the experience method in calculating such additions.5 Those thrifts
electing to use the percentage-of-income method for additions to their
bad-debt reserve were allowed to deduct against their taxable income additions
to the reserve equal to 8 percent of taxable income.6
Public Law 104-188, the Small Business Job Protection Act, which was signed
by the President on August 20, 1996, repealed the special bad-debt reserve
provisions for thrifts. According to this law, thrifts are now treated
the same as banks for federal income tax purposes. Banks are not permitted
to use the percentage-of-income method for accounting for bad debt. Large
banks (those with aggregate assets over $500 million) may not use any reserve
method of accounting for bad debt, but must deduct bad debts as they occur
(specific charge-off method); small banks are allowed to use the experience
method or the specific charge-off method. These rules now apply to thrifts.
The Small Business Job Protection Act also waived recapture of bad-debt
reserves for the years prior to 1988. According to the Act, thrifts need
only to recapture reserves set aside after January 1, 1988, rather than
their entire bad-debt reserves. Congressional estimates are that there
are approximately $14.7 billion in bad-debt reserves in the industry, and
that approximately $10.3 billion are pre-1988 reserves and thus exempt
Liberal Branching Rights
The federal thrift charter confers the broadest geographic expansion authority
of any federally insured depository institution charter. Federally chartered
savings-and-loan associations that meet either the QTL test or the building-and-loan
test can branch nationally with no “opting in” or “opting out” requirement.
They also are not subject to any intrastate branching restrictions whereas
banks are subject to a range of restrictions on their statewide branching.
Figure 1 provides a graphic representation of state branching laws for
However, once again, the advantage that thrifts enjoyed relative to banks
has changed. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 reduced much of the historical branching advantage of savings
institutions. Under the terms of the Riegle-Neal legislation, adequately
capitalized and managed bank holding companies may acquire a bank in any
state beginning on September 29, 1995. As of June l, 1997, banks will be
permitted to merge and consolidate their operations in the various states
under one corporate structure, unless the state has “opted out” of interstate
branching. As of May 1996, 24 states and Puerto Rico had accelerated the
process by permitting interstate branching before June 1997, and an additional
11 states had “opted in” with interstate branching to begin on June 1,
1997. Only one state, Texas, had “opted out.” Of the states that have “opted
in,” however, only Indiana and Puerto Rico allow immediate interstate branching
by de novo institutions on a nonreciprocal basis and without other restrictions.
In regards to intrastate branching, as depicted by the chart on state branching
laws, most states have eliminated restrictions on intrastate branching
for commercial banks, with much of this liberalization having occurred
since 1985. Forty-one states now allow statewide branching and three additional
states, Colorado, Georgia, and Arkansas, will permit statewide branching
in 1997, 1998, and 1999, respectively. Of the remaining six, all allow
statewide branching through acquisition.
State Branching Laws*
Expanded Service Corporation Activities
Federal savings associations may invest up to 3 percent of their assets
in service corporations.7 Service corporations of federal savings associations
may “engage in such activities reasonably related to the activities of
Federal savings associations as the Office [of Thrift Supervision] may
determine and approve” (12 C.F.R. §545.74(c)). Under this “reasonably related”
standard the OTS has occasionally, on a case by case basis, approved service
corporation activities that would not be permitted to a national bank such
as insurance underwriting. In addition, the OTS has approved by regulation
a long list of permissible activities for thrift service corporations,
for which no prior approval is required. Most of the pre-approved activities
are also permissible for national banks. Major activities permissible for
service corporations of federal savings associations but not for national
banks are (1) real-estate development and real-estate management for third
parties and (2) selling many types of insurance on an agency basis.8
As of year-end 1995, 1,437 reporting savings associations had investments
in a total of 2,035 service corporations. The total reported investments
in service corporations were $5.4 billion, which represented less than
1 percent of the assets of the savings associations. The consolidated assets
of the service corporations were $18.9 billion, or approximately 2.5 percent
of the assets of the savings associations. Table 2 gives a breakdown of
the service corporations by major type of activity.
As shown in Table 2, the greatest number of service corporations were in
the business of real-estate development and sales (481 service corporations);
followed by insurance brokerages and agencies (347 service corporations);
acquiring improved real estate for sale or rental (254 service corporations);
property management and maintenance (117 service corporations); and mortgage
lending (99 service corporations). Of these top five thrift service corporation
activities, only mortgage lending and, to a limited extent, insurance sales
are activities also permissible for national banks.
Active Thrift Subsidiaries as of December 31, 19951
Primary Type of Business 3
Number of First-Tier Entities
Number of Their Subsidiaries
Consolidated Total Assets 2
Subsidiary Savings Association
Real-Estate Development and Sales
Acquiring Improved Real Estate
for Sale or Rental
Property Management and Maintenance
Insurance Brokerage, Agency5
Escrow, Trustee Services4
Appraisal, Inspection Services4
EDP, RSU Services4
Source: Division of Research and Statistics, FDIC. 1 Includes service corporations, their subsidiaries and joint ventures;
excludes "operating subsidiaries." 2 Data are from Thrift Financial Report, Schedule CSS, Item 120. 3 Data are from Thrift Financial Report, Schedule CSS, Item 100. 4 Activities that are also generally permissible for national banks. 5 Activities that are also permissible under certain circumstances for national
Ten thrifts accounted for 75 percent of the industry’s investments, with
two thrifts accounting for approximately 57 percent of the industry’s total
investment in service corporations at December 31, 1995. These two thrifts
are Household Bank FSB of Prospect Heights, Illinois, and Home Savings
of America FSB of Irwindale, California.
Few Limitations on Holding Companies
In considering a unification of the federal charters for depository institutions,
questions arise not only from the differences between the powers of federally
chartered depository institutions but also from the differences between
the powers of their holding company owners. Corporate owners of savings
associations and banks are holding companies: savings-and-loan holding
companies for savings associations and bank holding companies for banks.
Savings-and-loan holding companies can be further subdivided into two categories:
those in which non-thrift activities are essentially unrestricted9 and
those in which non-thrift activities are restricted. The vast majority
of savings-and-loan holding companies fall in the first, or unrestricted,
A savings-and-loan holding company in the unrestricted category is either
a unitary holding company — one that controls only one savings association
subsidiary, which meets the QTL test — or a multiple holding company, all
of whose savings association subsidiaries meet the QTL test and where no
more than one subsidiary was not acquired in a qualifying supervisory transaction.10
A savings-and-loan holding company in the restricted category has one or
more savings association subsidiaries that do not meet the QTL test. A
savings-and-loan holding company that has two or more savings association
subsidiaries that were acquired in other than qualifying supervisory transactions
would also be in the restricted category.
Unrestricted savings-and-loan holding companies may engage, directly or
through their non-thrift subsidiaries, in any activities that do not threaten
the safety and soundness of their subsidiary savings associations or that
do not have the effect of enabling a savings association to evade applicable
laws or regulations. Beyond these generalities, there are no limitations
on the scope of permissible activities of savings-and-loan holding companies
in the unrestricted category. Thus, savings-and-loan holding companies
in the unrestricted category are generally permitted to engage in activities
closely related to banking, general securities underwriting and dealing,
other financial services, real-estate investment and development, and commercial
and industrial enterprises. The latter categories allow activities as diverse
as manufacturing (cigarettes, containers, furniture) to retail operations
(hotels, drug stores and cosmetics) and services (refuse collection, utilities
and advertising). In the submission to Congress last year, the OTS indicated
that nearly all savings-and-loan holding companies in existence fell into
the unrestricted category.
Another savings-and-loan holding company classification is between diversified
and non-diversified. A diversified savings-and-loan holding company is
defined by statute as one in which the subsidiary savings association and
certain other financial activities represent less than 50 percent of consolidated
net worth and consolidated net earnings. One of the few legal consequences
flowing from classification as a diversified savings-and-loan holding company
is that an exception to the Management Interlocks Act may be triggered.11
The major affiliations between savings associations and non-banking organizations
are found in diversified holding companies.
The counting of savings-and-loan holding companies is complicated by the
existence of a number of multi-tiered organizations with a variety of ownership
arrangements. As of July 9, 1996, the OTS reported the following number
of first-tier thrift holding companies: 28 diversified unitary holding companies;
650 non-diversified unitary holding companies; no diversified multiple
holding companies; and 44 non-diversified multiple holding companies. The
total number of savings-and-loan first-tier holding companies by this count
In contrast to most savings-and-loan holding companies, bank holding companies
are limited to “nonbank” activities the FRB has found, by regulation or
order, to be “closely related to banking and a proper incident thereto.”
The broad categories of activities the FRB has found to meet these criteria
are securities brokerage; to a limited extent securities underwriting;
mortgage banking; commercial finance; consumer finance; leasing; small-business
investment companies; insurance underwriting; and insurance agency. The
insurance activities are severely constricted by statute and are principally
limited to credit-related and grandfathered activities.
As of June 1996, the number of bank holding companies was 5,293. These
holding companies held almost 80.3 percent of the assets of all FDIC-insured
U.S. banks and thrifts. Bank holding company nonbank activities are concentrated
in the larger bank holding companies, which are required to report financial
data on these activities. According to the latest data available from the
FRB, in 1994, 238 holding companies reported nonbank activities to the
FRB. Total nonbank assets for these reporting companies were $270.2 billion,
and the ratio of nonbank assets to total assets of the organizations was
Nonbank net income was $2.9 billion, and the ratio of nonbank net income
to total net income was 8.29 percent. For the period 1986 to 1994, the
ratio of nonbank assets to total assets for reporting companies ranged
from a low of 6.91 percent in 1991, to the high of 8.40 percent in 1994.
Over the same period, the ratio of nonbank net income to total net income
ranged from a low of 1.22 percent in 1991, to a high of 14.35 percent in
Pros and Cons of Charter Unification
The recently enacted Deposit Insurance Funds Act of 1996 requires the Secretary
of the Treasury to submit a report to the Congress by March 31, 1997, on
the issues surrounding the development of a common charter for all insured
depository institutions and the abolition of separate and distinct charters
for banks and savings associations. The Act further requires that the BIF
and the SAIF be unified on January 1, 1999, provided no insured depository
institution remains as a savings association at that time.
This section discusses the major arguments for and against abolishing the
current two-charter federal system for depository institutions and replacing
it with a one-charter system. Because it makes little sense to unify the
charters without also unifying the BIF and the SAIF, it assumes that if
the charters are unified, the BIF and the SAIF will be merged by January
The arguments for a unified charter are not clear-cut — conflicting arguments
and evidence can be advanced to either support or oppose a position. The
major argument for a unified charter is that there is no longer a need
for a thrift industry due to structural changes in housing finance: the
thrift industry is no longer necessary to satisfy the societal need for
which it was established, and therefore the thrift charter should be abolished.
This argument is often buttressed with arguments that the long-term viability
of the thrift industry is in question, and that the current restrictions
on thrift activities hamper the ability of thrift institutions to respond
to changes in the marketplace. Replacement of the current federal two-charter
system for depository institutions with a one-charter system would “level
the playing field” between thrifts and banks and allow them to compete
These latter arguments for a unified charter, with a few twists, can also
be used to support the major opposing position—that there is no need for
charter unification, but easier entry and exit between banks and thrifts.
This position argues that what is needed are certain adjustments to current
law, short of charter unification, that will enable banks and thrifts to
switch charter types easily. These changes will “level the playing field,”
and allow the market to decide of its own accord whether the thrift industry
is viable and should survive.
The major arguments are examined below.
Arguments for Unification of Charters. According to proponents of this
viewpoint, due to structural changes in housing finance, a separate legal
status for a class of institutions to ensure availability of housing finance
has become unnecessary. As Federal Reserve Board Chairman Greenspan stated
in his September 21, 1995, testimony to the Banking Subcommittee on Financial
Institutions and Consumer Credit . . . “The nexus between thrifts and housing
largely has been broken without any evident detriment to housing finance
Statistics would appear to bear this out. Over a period of two decades,
the thrift industry has seen the gradual erosion of its share of the market
that the industry’s separate status was designed to foster. Between 1975
and 1994, the market share held by savings institutions dropped from 45
percent of total mortgages to 13 percent; from 56 percent of home mortgages
to 14 percent; and from 39 percent of multifamily residential mortgages
to 22 percent.13 Concerning originations, in 1975, thrifts originated 58
percent of home mortgages. By 1994, home mortgage originations by thrifts
were down to 20 percent of the total.14
Thus, the housing market — the support and development of which has provided
the rationale for a legally distinct thrift industry — has come to be less
dependent on the thrift industry. Much of the thrift industry’s lost share
of mortgages it held has gone to federally related mortgage pools—mortgage-backed
securities guaranteed or issued by the Government National Mortgage Association,
the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Farmers Home Administration. Much of the thrift industry’s
lost share of mortgages that it originated has gone to mortgage banking
It might be argued that though the thrift industry today appears to be
less important to the health of the housing industry than in the past,
the housing industry would still be harmed if the forced orientation of
thrifts to housing were removed. However, this is not clear. The threshold
for the QTL test is 65 percent of portfolio assets invested in specified
assets largely related to housing finance. Yet as shown in Table 1, as
of year-end 1995, 80 percent of thrifts held 75 percent or more of their
portfolio assets in assets that qualified for the QTL test — substantially
more than was necessary to meet the test. Therefore, as the QTL constraints
appear to be non-binding, one would not expect that removing these constraints
would result in a significant shift in thrift behavior. Moreover, as noted
earlier, the QTL test has just been relaxed; thus, to the extent thrifts
want to make incremental changes in their portfolios, they will be able
to do so.
In addition, thrifts have not demonstrated a desire to expand into other
fields by making full use of the asset powers now available to them. For
example, federal savings associations can invest up to 10 percent of their
assets in commercial loans, but as of year-end 1995, their commercial loans
amounted to only 1 percent of assets.15 At that same date, only 89 institutions
had more than 5 percent of their assets in commercial loans. Consequently,
any shifts of institutions from or to a focus on housing finance is likely
to be over an extended period and in response to market forces.
Indeed, lack of flexibility in responding to changing market forces caused
by savings associations’ mandatory orientation toward housing is another
reason often advanced for eliminating the federal savings association charter.
If savings associations cannot redeploy their assets in response to the
market, there will be excess capacity in the thrift industry. This in turn
will lead to lower profitability, difficulty in attracting new capital,
and a tendency to invest in riskier assets in order to maintain earnings.
According to this view, it is better to eliminate the savings association
charter than risk the losses — especially in light of federal deposit insurance—resulting
from an inflexible charter.
Arguments against Unification of Charters. According to proponents of this
viewpoint, the market — not the government — should decide whether a charter
is obsolete. Thus, while the status quo is not desirable because it impedes
the workings of the market, if certain adjustments were made to current
law to enable banks and thrifts to switch charter types more easily, the
institutions themselves could choose their future organizations based upon
their individual situations. If thrifts could become banks without penalty
and without adverse consequences for themselves or their owners, many,
perhaps most, might do so. Removal of many of the barriers to entry and
exit would allow the thrifts themselves to decide their future. If housing
finance were profitable, then many thrifts — those that are operated with
the proper attention to controlling costs and to prudent practices — would
likely choose to remain as thrifts. But if housing finance entered a period
of doldrums, particularly for an extended period of time, they would be
free to reorient their efforts, and the industry would not become burdened
with excess capacity.
The current impediments to thrifts switching to banks were described earlier.
The major financial penalty — the recapture of bad-debt reserves for thrifts
that became banks — has been addressed by legislation. Another restriction
— imposition of the banking industry’s remaining geographic restrictions
upon converting thrifts — has been whittled away over time by activity of
the states, and, as discussed earlier, has been addressed by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994. Two major impediments
remain to switching charters. They are the prohibition against banks owning
service corporations engaged in many insurance activities and real-estate
development activities;16 and the different requirements for thrift and
bank holding companies — some corporate owners of thrifts could not qualify
as bank holding companies. Short of changing the laws governing banks and
bank holding companies, one way to ease these impediments would be to allow
a number of years for a thrift or holding company to divest of the impermissible
Charter Unification Implementation Issues
If a decision were made to unify the federal bank and thrift charters,
implementation issues would arise at both the institution and holding company
level. Many of these issues, such as the sale of insurance products by
depository institutions or the separation between banking and commerce,
are legitimate public-policy concerns in their own right. The prospect
of charter unification brings them to the fore.
This section discusses these implementation issues and presents options
for dealing with them. Again, as stated in the introduction, the options
it examines concern only those powers that either banks or savings associations
currently have. It does not broach financial modernization in its broader
This section also reviews the impact that charter unification would have
in several related areas: the QTL test, state-chartered thrift institutions,
mutual savings associations, and the Federal Home Loan Bank System. Grandfathering
is one option to deal with some of the implementation issues that would
arise from charter unification. An appendix contains an historical overview
of grandfathering within the context of financial industry legislation.
Issues at the Depository Institution Level
At the depository institution level, implementation issues arise in three
areas: the asset powers of the depository institution; the powers of thrift
service corporations; and branching restrictions.
Asset Powers. At the institution level, commercial banks have more extensive
asset powers than savings associations whose investment in certain types
of loans is restricted. As discussed in the previous section, the major
argument for unifying the federal bank and thrift charters is that there
is no longer a need for a special-purpose charter focused on the housing
industry. In addition, broader asset powers allow for greater diversification
and more competition, while not precluding the possibility of an institution
specializing if that is its business strategy. Given the above, if the
federal bank and thrift charters were to be merged, the only plausible
alternative is to give the resultant institution the asset powers of a
Savings Association Service Corporations. One of the more difficult questions
about charter unification at the institution level concerns the service
corporations of federal savings associations. As discussed earlier, federal
savings associations can invest up to 3 percent of their assets in service
corporations. Also, while national banks can perform most of the pre-approved
activities permissible for thrift service corporations, both directly and
through operating subsidiaries, they are not permitted to engage in real-estate
development and the management of real estate for third parties, or to
sell most types of insurance without restriction (although recent judicial
decisions have expanded the insurance agency powers of national banks).
As of year-end 1995, there were 255 savings associations with insurance
subsidiaries. Most of these were at relatively small institutions, 207
of the 255 had under $1 billion in assets. Although no data are available
on the activities of these insurance subsidiaries, anecdotal evidence indicates
that many are restricted to the sale of credit-related insurance products,
an activity permissible to subsidiaries of national banks.
Insurance brokerage and agency are basically sales-oriented activities
and do not present safety-and-soundness issues. The sale of insurance by
banks would provide customers with greater choice, and promote greater
efficiency in the marketplace. Therefore, if federal bank and thrift charters
were merged, a reasonable course of action would be to extend full insurance
agency powers to national banks. However, as a practical matter, such a
move might encounter significant political opposition.
Unlike insurance, real-estate activities, especially real-estate development,
do raise safety-and-soundness issues.17 FIRREA required that equity investments
and loans to service corporations engaged in activities not permissible
for national banks be deducted from capital. As a result, federal savings
associations no longer engage in real-estate activities on a large-scale
basis. Savings associations reported $77.7 billion in real-estate service
corporation assets at year-end 1989.18 By year-end 1995, this figure had
fallen to $3.4 billion.
Despite the current low level of real-estate investment by savings associations,
the divergent real-estate powers of federal savings associations and banks
would need to be addressed if the federal charters were merged. One way
to deal with those risks would be to require that any real-estate development
or management activities be conducted in a bona fide subsidiary, with the
bank’s investment (both equity and loans) deducted from capital, and with
the subsidiary subject to Section 23 of the Bank Holding Company Act type
restrictions. With the exception of the Section 23 requirements, these
conditions already apply to thrift service corporations.19
Branching Restrictions. As discussed earlier, bank branching powers are
in some cases more restrictive than federal savings association branching
powers, although they have come much closer together over time. Full interstate
and intrastate branching provides for the greatest diversification of risk,
the greatest convenience for customers, and the greatest market efficiencies.
Given these facts, the near universality today of statewide branching,
and the clear momentum to interstate branching, a reasonable course of
action should the federal charters be unified would be to allow full interstate
and intrastate branching.
Issues at the Holding Company Level
The most difficult issue regarding the single federal charter concerns
holding companies. Except for possible grandfathered situations (and ignoring
the complication that would result if thrift charters were continued at
the state level), the distinctions between savings-and-loan holding companies
and bank holding companies would have to be eliminated. Table 3 contains
a list of unitary diversified savings-and-loan holding companies, the type
of savings-and-loan holding company most likely to contain significant
nonfinancial businesses. As can be seen from the table, as of June 1996,
there were only 28 such companies.
Four approaches to eliminating the prospective differences between savings-and-loan
holding companies and bank holding companies could be taken (existing affiliations
are discussed below): (1) holding companies could be allowed to engage
in virtually any activity, the approach taken with unrestricted savings-and-loan
holding companies; (2) holding companies could be restricted to a limited
number of financially related activities, the approach currently taken
with bank holding companies; (3) holding companies could be allowed to
engage in most financially related activities, including, with proper safeguards,
investment banking and the insurance business, but prohibited from nonfinancial
activities; or (4) holding companies whose depository institutions met
the QTL test (or similar test) could be allowed to engage in any activity
that did not threaten the safety and soundness of the institution.
28 Thrift Diversified Holding Companies*
as of June 1996
Type of Business
Thrift Assets ($000s)
Acacia Mutual Life Insurance Co.
Acacia Federal Savings Bank
American Mutual Holding Company
First FS&LA of Rochester
Carpenters Pension Trust Fund Southern California
United Labor Bank, FSB
Club Corp. International
Franklin Federal Bancorp., FSB
Equity Holdings Ltd.
Firstate Fin., F.A.
Estate of Bernice Pauahi Bishop
Southern Cal. FS&LA
First Pacific Investment Ltd.
United Savings Bank
First Pacific Investment Ltd. II
United Savings Bank
Hawaiian Electric Industries, Inc.
American Savings Bank, FSB
Heritage Mutual Insurance Co.
Westland Savings Bank SA
Hy-Vee Food Stores
Midwest Heritage Bank, FSB
Illinois Mutual Life & Casualty Co.
Krause Gentle Corp.
Gas and Food
Liberty Savings Bank, FSB
Massachusetts State Carpenters Pension Fund
First Trade Union Savings Bank, FSB
Massachusetts State Carpenters Guaranteed Annuity Fund
First Trade Union Savings Bank, FSB
McMorgan & Co.
Manages Union Pension Funds
United Labor Bank, FSB
P H M Corporation
First Heights Bank, FSB
Pacific Electric Wire & Cable
Pacific Southwest Bank
Prudential Insurance Co.
The Prudential Savings Bank, FSB
Raymond James Financial, Inc.
Raymond James Bank, FSB
Southwest Gas Corp.
Primerit Bank, FSB
Sun Life Assurance Co.
New London Trust, FSB
Temple Inland, Inc.
Guaranty Federal Bank, FSB
The Langdale Co.
Manufacturing- Forest Based Products
Commercial Banking Co.
The Monticello Cos., Inc.
United Services Automobile
USAA Federal Savings Bank
Watts Health Systems, Inc.
Family Savings Bank, FSB
*First-Tier Holding Companies
Source: The Office of Thrift Supervision
Of these four options, the third option — permitting bank holding companies
to expand into most financially related activities but with a continued
prohibition against nonfinancial activities — would appear to be the most
desirable. While the elimination of the separation between banking and
commerce may be worth considering in the long run, a more cautious policy
of bank expansion into other financial activities is probably a more prudent
Banking organizations have expertise in managing certain financial risks.
They should leverage this expertise before branching out into commercial
ventures. In addition, bank regulators should develop a body of experience
to evaluate the safety-and-soundness implications of any new financial
affiliations before allowing broader affiliations with firms exposed to
a different range of risks. On the other hand, compared to the status quo,
allowing banks to expand into other financially related activities — perhaps
through either holding companies or direct subsidiaries — would strengthen
banking organizations by allowing diversification of income sources and
better service to customers, and would promote an efficient and competitive
evolution of U.S. financial markets.
With respect to using the QTL test, or some variant thereof, to determine
holding company powers, in order for such an approach to make sense, some
nexus would have to be established between the test and broader holding
company powers. Absent such a nexus there would be no reason to distinguish
between the powers of a holding company of a depository institution that
met the test and powers of one that did not.
As to existing affiliations, commercial companies have not historically
been a source of risk to the thrift industry. The OTS reports that unitary
thrift holding companies, rather than having caused harm to their subsidiaries
in the past, have in fact provided a source of strength to them during
times of need. Additionally, affiliations between thrifts and commercial
organizations do not appear to be extensive.20 Thus, the grandfathering
of existing relationships might be feasible. In fact, some affiliations
between commercial companies and bank holding companies were already grandfathered
by the 1970 Amendments to the Bank Holding Company Act (see appendix).
On the other hand, given the limited number of affiliations, divestiture
would not require widespread restructuring of the thrift industry.
Charter unification raises issues in addition to the powers of depository
institutions, their affiliates, and their holding companies. The topics
in the following discussion concern the QTL test, state-chartered savings
associations, mutual savings associations, and the Federal Home Loan Bank
QTL Test. If the charters are merged, the QTL test would basically be moot
with two possible exceptions. First, as noted earlier, the QTL test could
be used to exempt a holding company from the strictures of the Bank Holding
Company Act. However, also as noted earlier, such a distinction would only
make sense if there was a nexus between the QTL test and holding company
powers. Second, the QTL test — or more accurately the percentage of QTL assets — is
used to establish the amount of FHLB stock a non-savings association FHLB
member must hold for a given amount of advances (the higher the ratio,
the less stock). The role of the FHLBs and what characteristics, if any,
their members should have is beyond the scope of this study. Depending
on the mission of the FHLB System, requiring some continued portfolio orientation
(although not necessarily the current QTL assets) in order to enjoy the
benefits of FHLB advances may make sense.
State-Chartered Savings Associations.If the federal savings association
charter were eliminated, a major question is whether state-chartered savings
associations should be eliminated as well. As noted earlier, the Deposit
Insurance Funds Act of 1996 requires that the BIF and the SAIF be merged
on January 1, 1999, provided no institution remains as a savings association
at that time.
Eliminating state-chartered thrifts might prove difficult. In order to
eliminate state-chartered thrifts effectively, such a ban would have to
include state-chartered savings banks as well as state-chartered savings-and-loan
associations. As a general matter, states are allowed to issue limited-purpose
charters. In addition to chartering savings-and-loan associations and savings
banks, the states issue charters for trust companies, cooperative banks,
and industrial banks. To force them to eliminate a specific type of limited
charter would be a blow to the dual banking system. It would also be difficult
to prevent a state from reincarnating a charter that looked very much like
a savings association charter with a different name.
Short of mandating the elimination of the state thrift charter, state-chartered
savings associations could be subjected to Section 24 of the FDI Act, which
would require that they not engage in any activity not permissible for
a national bank without FDIC approval.21 They could also be made subject
to the Bank Holding Company Act with whatever grandfathering or other provisions
that would apply to federal savings associations.22 Under such circumstances,
state-chartered savings associations would probably lose their attractiveness.
Many state-chartered savings associations might choose to convert to banks
and some states might eliminate their thrift charters, but this would be
accomplished without tampering with the dual banking system.
Mutual Savings Associations. At June 30, 1996, there were 410 mutual federal
savings associations and 714 stock federal savings banks. While in number
mutuals represent 36 percent of federal savings associations, they accounted
for only 10 percent of the assets held by such institutions ($72 billion
out of a total of $717 billion in assets). Including state-chartered savings
and loans and savings banks there were a total of 943 mutual thrifts and
1,038 stock institutions. Mutual institutions hold a total of 17 percent
of thrift assets ($179 billion out of a total of $1,023 billion). Commercial
banks all take stock form.
The FDIC Division of Research and Statistics has looked at recently chartered
de novo savings associations to determine whether the mutual form of organization
has proven to be attractive to new industry entrants. According to a preliminary
review, only a handful of savings associations over the past ten years
have chosen the mutual form of organization. At least two were credit unions
converting to savings associations. It is not clear that any of the new
mutual charters over this period were true de novo mutual savings associations.
Given the large number of mutual thrifts, it does not make sense to change
the status quo and require conversion. The other options are to grandfather
existing mutuals but not grant new mutual charters, or to continue to grant
new mutual charters, effectively extending the possibility of the mutual
form to commercial banks. Historically, the mutual form of organization
has not raised safety-and-soundness concerns. As such, there does not appear
to be any reason not to follow this latter course.
Federal Home Loan Bank System (FHLBS). Replacement of the two-charter federal
system with a single charter would have an impact on the Federal Home Loan
Bank System (FHLBS). Federal savings associations are currently required
to be members of the FHLBS. Elimination of the federal thrift charter could
result in a voluntary FHLBS that would not have the automatic capital support
of the current system. However, it should be noted that as of August 1996,
federal savings associations accounted for only 19 percent of FHLBS members
(commercial banks accounted for 65 percent, state-chartered thrifts 13
percent, and others 3 percent). Moreover, according to the Federal Housing
Finance Board, since April 1995, when FHLBS membership was made voluntary
for OTS-regulated state-chartered thrifts, no such thrift has left the
system.23 It is likely that many federal savings associations would also
choose to retain their FHLBS membership if such membership were to become
voluntary. The FHLBS is therefore unlikely to face crisis if the federal
thrift charter were eliminated.
Grandfathering in Banking Legislation
This appendix outlines how past legislation mandating changes in the banking
industry dealt with the problem of existing activities and ownership arrangements.
The approaches taken fall into two general categories: (1) requiring that
existing activities and arrangements be ceased or divested; and (2) permitting
the continuation of existing activities and arrangements. The second approach
is often termed "grandfathering" and itself encompasses a range of controls.
At one end of the spectrum, the continuation of existing activities and
arrangements has been tightly circumscribed, even "frozen" as they were
on a grandfather date. At the other end of the spectrum, few controls
have been placed on the continuation, and the activities have thus enjoyed
room for growth. An accompanying table summarizes the prohibition, divestiture,
and grandfather provisions of the major laws covered in the discussion.
Glass-Steagall. Four provisions of the Banking Act of 1933 largely required
the divestiture and continued separation of the investment banking and
commercial banking businesses. The divestiture period was one year. The
Glass-Steagall Act is still the law, but judicial and regulatory interpretations
and developments in financing and investment techniques have eroded many
of the distinctions between the two businesses.
Bank Holding Company Act of 1956 — Nonbanking Activities. The Bank Holding
Company Act of 1956 generally required multibank holding companies to divest
themselves of businesses extraneous to banking. The divestiture period
was two years, which the Federal Reserve Board (FRB) could extend in individual
cases to a maximum of five years.
Bank Holding Company Act of 1956 — Interstate Banking. The Bank Holding
Company Act of 1956 provided that the FRB could not approve an application
by a bank holding company to acquire voting shares on substantially all
assets of a bank outside of its home state unless the acquisition was expressly
permitted by the law of the target state. Twelve existing interstate holding
companies were grandfathered. In the late 1970s and throughout the 1980s,
states relaxed their laws to permit various degrees of interstate expansion
by bank holding companies. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 authorized interstate expansion by bank holding
companies beginning one year after its enactment. The Act also authorized
interstate branching by banks beginning on June 1, 1997, unless a state
either accelerates the effective date or opts out of interstate branching.
Bank Holding Company Act Amendments of 1970. The Bank Holding Company Act
Amendments of 1970 brought single-bank holding companies within the jurisdiction
of the Act and gave the FRB leeway to expand the nonbanking activities
permitted bank holding companies. Companies that became bank holding companies
as a result of the Amendments were given a ten-year period to divest impermissible
activities they were directly or indirectly engaging in. Two primary grandfathered
situations were provided for, the $60-million limitation and the hardship
$60-Million Limitation. Under Section 4(a)(2) of the Bank Holding Company
Act (12 U.S.C. §1843(a)(2)), a company that became a bank holding company
as a result of the Amendments and that was engaged in activities on June
30, 1968, that became impermissible because of the Amendments could continue
to engage in the activities unless the FRB determined termination was necessary
to prevent undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices. The FRB was required
to make such a determination within two years if a company's bank had assets
of over $60 million or within two years of the reaching of that level by
a bank. The divestiture period after such a determination by the FRB was
ten years. Under the $60-million limitation, a bank holding company could
only continue existing impermissible nonbanking activities and not engage
in new impermissible ones.
Hardship Exemption. Under Section 4(d) of the Bank Holding Company Act
(12 U.S.C. §1843(d)), the FRB could grant exemptions from the Act for a
company that became a bank holding company as a result of the Amendments,
that controlled a single bank on July 1, 1968, and that did not subsequently
acquire another bank. The exemptions could be subject to such conditions
as the FRB considered necessary to protect the public interest. Unlike
the grandfather privileges under the Section 4(a)(2) $60-million exemption,
an exemption under Section 4(d) permitted a bank holding company to expand
into new nonbanking activities. An exemption had to be based on one of
three grounds: (1) to avoid disrupting business relationships that had
existed over a long period of years without adversely affecting the banks
or communities involved; (2) to avoid forced sales of small locally owned
banks to purchasers not similarly representative of community interests;
or (3) to allow retention of a bank so small in relation to the holding
company's total interest and so small in relation to the banking market
as to minimize the likelihood that the bank's powers to grant or deny credit
would be influenced by a desire to further the holding company's other
Prohibitions, Divestitures, and Grandfathering in Banking Legislation
Selected banking industry legislation containing prohibition, divestiture,
and grandfathering provisions are listed in this table. The provisions
are described in greater detail in the accompanying text, which also covers
Prohibitions and Divestitures
Glass-Steagall Act, 1933
Investment Banking and Commercial Banking -- One-Year Divestiture Period
Bank Holding Company Act of 1956
(1) Bank Holding Company Nonbank Activities
Unless Permissible- - Two-Year Divestiture Period,
Extendable to Five Years
(2) Interstate Bank Holding Companies Prohibited
Without State Permission
(2) Existing Interstate Bank Holding Companies
Bank Holding Company Act Amendments of 1970
Bank Holding Company Nonbank Activities Unless Permissible --Ten-Year
(1) Existing Nonbank Activities of Bank Holding Companies With Bank Subsidiaries Smaller
Than $60 Million in Assets (2) Hardship Exemption
International Banking Act of 1978
U.S. Nonbank Activities of Foreign Banks
With Branches, Agencies, or Commercial Lending Companies in
U.S. -- Seven-Year Divestiture Period
Existing Securities Affiliates
Garn-St Germain Act, 1982
Bank Holding Company Insurance Activities Unless
Specifically Permitted by Statute
(1) Existing Insurance Activities
(2)Any Insurance Activities by a
Bank Holding Company Con-
ducting an Insurance
to January 1, 1971
Competitive Equality Banking Act, 1987
Nonbank Banks (Nonbank banks were not
prohibited, just brought within
the Bank Holding Company Act's definition
of a bank.)
Existing Nonbank Banks (Owners that were not bank holding
companies could continue
becoming bank holding companies;
owners that were bank holding
companies could continue ownership
despite what might otherwise be
violations of interstate banking
Altogether, the FRB granted approximately 12 hardship exemptions. Among
the companies that received exemptions were The Goodyear Tire & Rubber
Company, Olin Corporation, Minnesota Mining and Manufacturing Company,
and Beneficial Corporation. Data on the hardship exemptions are presented
in an accompanying table.
Foreign Banks — Nonbanking Activities. Among other things, the International
Banking Act of 1978 made the restrictions on nonbanking activities contained
in the Bank Holding Company Act applicable to a foreign bank that maintained
a branch, agency, or commercial lending company in the United States (12
U.S.C. §3106(a)). Foreign banks could retain any nonbank investment or
continue any nonbank activity until December 31, 1985. Grandfather privileges
were granted beyond that date for direct or affiliate activities conducted
on or applied for by July 26, 1978. In addition, foreign banks engaged
since July 26, 1978, in underwriting, distributing, or selling securities
in the United States through "domestically controlled affiliates" were
permitted to engage in new activities through the affiliates or acquire
the assets of going concerns through the affiliates. Under an FRB interpretation
that was codified into the International Banking Act in 1987, a foreign
bank that acquires a bank in the United States loses its grandfather rights.
Bank Holding Company Insurance Activities. In 1982, the Garn-St Germain
Act, among other things, amended Section 4(c)(8) of the Bank Holding Company
Act (12 U.S.C. §1843(c)(8)) to restrict the insurance activities of bank
holding companies. Two grandfather situations were provided for. First,
insurance agency activities conducted by a bank holding company on May
1, 1982, or approved for the company by the FRB on or before that date,
could be continued. Further, the activities could be expanded to new locations
in the state of the bank holding company's principal place of business,
in adjacent states, and in other states where the activities were conducted
on the grandfather date. And the agency activities could be expanded to
include new types of insurance insuring against the same types of risk.
Second, the FRB could approve new insurance activities for a bank holding
company engaged in insurance agency activities prior to January 1, 1971,
pursuant to FRB approval prior to that day. Insurance activities permitted
under this second grandfather provision were not limited to those conducted
in 1971. The Garn-St Germain amendment also provided for the growth of
a $10,000 ceiling it imposed on extensions of credit for which finance
company subsidiaries of bank holding companies could sell credit-related
insurance. The ceiling increased annually to match the increase in the
Consumer Price Index.
Competitive Equality Banking Act — Nonbank Banks. The Competitive Equality
Banking Act of 1987 (CEBA) was signed into law on August 10, 1987. The
cut-off date used in the grandfather provisions of this legislation was
March 5, 1987. Among other things, CEBA closed the "nonbank bank" loophole
in the Bank Holding Company Act by broadening the definition of "bank"
in that Act to cover any institution that either met the then-existing
definition or was insured by the FDIC (12 U.S.C. §1841). Several grandfather
situations were provided for:
Section 4(d) Approvals
Holding Company and Bank
Assets of Bank (in $ millions)
1. The Goodyear Tire & Rubber Company Akron, Ohio The Goodyear BanK, Akron, Ohio
Goodyear Bank was part of Goodyear until 07/15/82. Now owned by National
City Corp of Cleveland.
2. Olin Corporation, New York, New York Illinois State Bank,
East Alton, Illinois
Illinois State Bank of East Alton was controlled by Olin until 08/12/85.
Now a branch of Magna Bank of St. Louis.
3. Milton Hershey School and School Trust Hershey, Pennsylvania
The Hershey National Bank, Hershey, Pennsylvania
Hershey National Bank was affiliated with Milton Hershey until 03/14/86.
Now a branch of PNC Bank of Pittsburgh.
4. CPC International, Inc. Englewood Cliffs, New Jersey
Argo State Bank, Summit, New Jersey
Argo State Bank was part of CPC until 08/04/82. It then became part of
Harris Bancorp, which became a subsidiary of Bank of Montreal. Still a
bank under same identification number. Assets totaled $192,517 (in thousands)
as of 12/31/95.
5. Minnesota Mining and Manufacturing Company
St. Paul, Minnesota Eastern Heights State Bank, St. Paul, Minnesota
Eastern Heights State Bank is still owned by MMM. Bank assets totaled $376,151
(in thousands) as of 12/31/95.
6. Beneficial Corporation Wilmington, Delaware
Peoples Bank and Trust Company,
Peoples Bank and Trust is still owned by Beneficial Corporation. Bank assets
totaled $414,430 (in thousands) as of 12/31/95.
7. Heldenfels Brothers, Contractors Corpus Christi, Texas
First National Bank, Rockport, Texas
FNB of Rockport became a branch after it was merged into Victoria Bank
and Trust Co. on 12/02/92.
8. R. R. Donnelley Sons Company Chicago, Illinois
Lakeside Bank, Chicago, Illinois
Lakeside Bank was owned by Donnelley until 09/28/93. It is now owned by
Lakeside Bancorp. Bank assets totaled $217,965 (in thousands) as of 12/31/95.
9. The Moody Foundation, Galveston, Texas The Moody National
Bank of Galveston Galveston, Texas
Moody NB of Galveston was owned by Moody Foundation until 05/25/84. Now
owned by Moody Bankshares. Bank assets totaled $289,724 (in thousands)
as of 12/31/95.
10. W. J. Young Co., Clinton, Iowa The Clinton National Bank,
Clinton National Bank is still owned by W. J. Young and Co. Bank assets
totaled $225,444 (in thousands) as of 12/31/95.
11. Trustees of Dartmouth College Hanover, New Hampshire
Dartmouth National Bank
Hanover, New Hampshire
Dartmouth National Bank became a branch of Fleet Bank - NH on 10/01/89.
12. Charles Stewart Mott Foundation Flint, Michigan
The Wayne Oakland Bank, Royal Oak, Michigan
The Wayne Oakland Bank was acquired by First of America on 06/06/83.
Nonbank Holding Company Owners. A company that controlled a nonbank bank
on March 5, 1987, and was not a bank holding company before the enactment
of CEBA would not be treated as a bank holding company solely by virtue
of its control of the nonbank bank (12 U.S.C. §1843(f)). Within 60 days
after enactment, such companies had to identify themselves to the FRB.
In general, grandfather rights would be lost if the company otherwise became
a bank holding company or if the nonbank bank did one or more of several
things: (1) began to engage in activities in which it was not lawfully
engaged on March 5, 1987; (2) offered or marketed products or services
of affiliates that were not permitted for bank holding companies, or permitted
its products or services to be offered or marketed by affiliates whose
activities were broader than those permitted for bank holding companies,
unless the products or services were offered or marketed as of March 5,
1987, and then only in the same manner; (3) permitted any overdraft on
behalf of an affiliate or incurred any overdraft in its account at a Federal
Reserve Bank on behalf of an affiliate (with exceptions regarding inadvertent
overdrafts and affiliates that were primary dealers); or (4) increased
its assets by more than 7 percent in any one 12-month period beginning
one year after enactment of CEBA. A company losing its grandfather exemption
would have 180 days after loss of the exemption to either divest each bank
it controlled or come into compliance with the Bank Holding Company Act.
A list of nonbank banks and their parents is given in an accompanying table.
Bank Holding Company Owners. Notwithstanding most other provisions of
Section 4 of the Bank Holding Company Act—the then-limitations on interstate
banking operations being the main concern—a bank holding company controlling
an institution that became a bank by virtue of CEBA generally could retain
control of the bank if the bank: (1) did not engage after enactment in
any activity that would have caused it to be a bank pre-CEBA (that is,
it did not begin both accepting demand deposits and making commercial loans);
or (2) did not increase the number of locations from which it conducted
business after March 5, 1987 (12 U.S.C. §1843(g)).
Nonbank Banks and Their Parents
December 31, 1995
Domestic Assets ($000s)
American Express Centurion Bank
Shearson American Express
Sears Roebuck & Company
First Deposit NB
Merrill Lynch Bank & Trust Co.
Merrill Lynch &Company
Custodial Trust Company
Bear Stearns Companies, Inc.
Hurley Street Bank
Sears Roebuck & Company
Firstrust Savings Bank
Prudential Bank & Trust Company
Prudential Insurance Company
Hickory Point Bank & Trust Co.
J C Penny NB
J C Penny Company
Commercial Credit Company
American Investment Bank NA
Leucadia National Corporation
State Savings Bank
First Signature Bank & Trust Co.
John Hancock Mutual Life Ins. Co.
California Central TR BK CORP
Domestic Credit Corporation
Fidelity Management Trust Co.
Fidelity Management & Research
First American Trust Company
First American FC
Lyndon Guaranty Bk of New York
Explicit Exemptions. CEBA exempted certain special-purpose banks from the
Bank Holding Company Act's new, broader definition of a bank. These exemptions
included limited-purpose trust companies, credit-card banks, certain industrial
loan companies, and the U.S. branches of foreign banks.
Competitive Equality Banking Act — Savings Banks. CEBA created a grandfathered
entity called a "qualified savings bank," which was defined as a state
savings bank organized on or before March 5, 1987. Under Section 3(f) of
the Bank Holding Company Act (12 U.S.C. §1842(f)) as amended by CEBA, a
"qualified savings bank" controlled by a bank holding company was permitted
to engage in any activities allowed by the law of its state, other than
certain insurance activities. The grandfather right would be lost if the
savings bank was acquired by a company that was not a savings bank or a
savings bank holding company, which was defined as a company whose qualified
savings bank subsidiaries constituted at least 70 percent of its assets.
Competitive Equality Banking Act — Savings-and-Loan Holding Companies.
CEBA grandfathered rights for certain savings-and-loan holding companies
that would otherwise cease to qualify as unrestricted savings-and-loan
holding companies because of a failure of their savings-and-loan subsidiaries
to satisfy a new QTL test. Without grandfather protection, the period to
bring savings-and-loan subsidiaries into compliance with the new QTL test
was two years. A grandfathered savings-and-loan holding company was one
that had received permission prior to March 5, 1987, to acquire control
of a savings-and-loan association. Such a grandfathered company was permitted
to engage in any activity in which it was lawfully engaged on that date.
This grandfather right could be lost for a number of reasons: (1) the holding
company acquired control of a bank or another savings-and-loan association
(except in a qualified supervisory transaction); (2) any savings-and-loan
subsidiary of the holding company failed to qualify under the Internal
Revenue Code thrift test; (3) the holding company engaged in any business
activity in which it was not engaged on March 5, 1987, and which was not
otherwise permissible for savings-and-loan holding companies; (4) any savings-and-loan
subsidiary of the holding company increased its number of business locations
after March 5, 1987, except by means of a qualified supervisory transaction;
and (5) any savings-and-loan subsidiary of the holding company permitted
an overdraft on behalf of an affiliate or incurred an overdraft in its
account at a Federal Reserve Bank on behalf of an affiliate, except an
inadvertent overdraft. CEBA also grandfathered cross-marketing arrangements
involving a savings-and-loan subsidiary of a diversified savings-and-loan
holding company—a company whose savings-and-loan subsidiary and related
activities represented less than 50 percent of its consolidated net worth
and consolidated net earnings-—and an affiliate to the extent they engaged
in such arrangements on March 5, 1987.
FIRREA — Savings Association Activities and Investments. Section 222 of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) created Section 28 of the FDI Act. Section 28 prohibits any state
savings association from engaging in any type of activity, or in an activity
in any amount, that is not permissible for a federal savings association
unless the FDIC determines the activity would pose no significant risk
to the affected insurance fund and the savings association is and continues
to be in compliance with certain capital standards (12 U.S.C. §1831e).2
The compliance date was January 1, 1990, less than four months from the
enactment of FIRREA, but divestiture of existing non-conforming assets
was not required. State savings associations also cannot make equity investments
impermissible for federal associations, except that certain investments
in service corporations are permissible. Impermissible investments had
to be divested by July 1, 1994.
FDICIA — State Bank Activities. Section 303 of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA) created Section 24 of the FDI Act,
which restricted the charter powers of insured state banks (12U.S.C.§1831a).
Section 24 prohibits insured state banks from engaging directly or through
subsidiaries in any activities not permissible for a national bank unless
the FDIC determines that an activity poses no significant risk to the deposit
insurance fund and the bank is in compliance with applicable capital standards.
The compliance period was one year from the date of FDICIA's enactment.
Certain very limited insurance activities provided through subsidiaries
were grandfathered. State banks also cannot make equity investments that
are not permissible for a national bank, with certain exceptions and subject
to the grandfathering of limited state-permitted investments in listed
securities. Impermissible equity investments had to be divested in five
years, except a three-year period was provided for compliance with the
limitation on state-permitted investments in securities.
Conclusion. Generalizations about Congressional selections between divestiture
on the one hand and a grandfather scheme on the other are difficult to
make. Each situation had its own unique circumstances. The relative political
power of the defenders of the status quo and of those who sought change
varied considerably from situation to situation, as did the degree of the
apparent "evil" that was the subject of the legislation. Nevertheless,
it seems reasonable to conclude that the selection was often influenced
by magnitude, that is, by the relative scope of the activities concerned.
Grandfather solutions appear to have been used more often in situations
when the relative impact would not be large.