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. Exempt Financial Institutions Vary by Size, Ownership, Activities, and Risks

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. Views on the Adequacy of Federal Regulation of Exempt Institutions Are Mixed

Representatives from the exempt financial institutions and an academic  told us that the current regulatory framework was sufficiently robust. FDIC officials  believe that they can adequately supervise exempt institutions but  acknowledged the safety and soundness benefits of consolidated  supervision. Federal Reserve and Treasury officials said while  exempt institutions have access to federal deposit insurance, most are  not subject to consolidated supervision. Removing the Exemptions Would Likely Have a Limited Impact on the Overall Credit Market and Would Not Increase Concentration in Most Credit Markets

			Market Shares for Exempt Institutions Limit Potential Impact on Overall Credit Market of Removing Exemptions

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. Views Varied on How Removing the Exemptions Would Impact Institutions’ Safety and Soundness and Financial System Stability

Representatives from three exempt institutions stated that if the  exemptions were removed, they would see no additional improvement in  safety and soundness. 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. In contrast, the  other exempt institutions are few in number and size, but their holding  companies are not subject to Federal Reserve’s supervision. Treasury provided written comments that have  been reprinted in appendix III. We also received technical comments from the New York  State Department of Financial Services, FDIC, and OCC, which we  incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

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. Number of Institutions and General Characteristics

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. 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. Finally, we used FDIC’s SOD data to identify commercial banks and all  institutions that are subsidiaries of bank holding companies. These exempt institutions include savings and loans (S&L), industrial  loan corporations, limited-purpose credit card banks, municipal deposit  banks, and trust banks.
Why GAO Did This Study

The Bank Holding Company Act of 1956 (BHC Act) establishes the legal framework under which bank holding companiesthat is, companies which own or control banksoperate 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.

What GAO Found

The 1,002 exempt financial institutions make up a small percentage of the assets of the overall banking systemabout 7 percentand 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.