Bank Holding Company Act history

Passed in 1956, the act was concerned with the nonbanking activities of bank holding companies (BHCs), whereas the BANKING ACT OF 1933 (Glass-Steagall Act) had dealt with the relationship between commercial and investment banks. The TransAmerica Corporation, a large California-based HOLDING COMPANY that owned the BANK OF AMERICA, was a major target of the BHCA since it had banking operations, insurance underwriting, manufacturing, and other commercial activities. The purpose of the BHCA was to regulate and control the creation and expansion of BHCs, separate banks from nonbanks within the BHC, and minimize the dangers of the concentration of economic power.

The major provisions of the Bank Holding Company Act were: (1) The board of governors of the Federal Reserve System (FRB) was given authority to regulate and examine BHCs, (2) the ownership of shares in corporations other than banks was generally prohibited, (3) prior approval of the FRB was required for acquisitions involving more than 5 percent of the stock of the acquired firm, (4) BHCs could acquire banks only in their home state unless the laws of another state specifically allowed them to expand into the new state though existing interstate companies were not required to divest the banks they already held, (5) transactions between BHCs and their affiliates were limited, and (6) the act reserved the rights of states to exercise jurisdiction over BHC activities. Although states did not have laws allowing interstate acquisition in 1956, they began adopting them in the 1980s and typically grandfathered companies such as Northwest Bancorporation in Iowa and First Interstate, which was operating in several western states.

The major loopholes in the legislation were the exemption of one-bank holding companies (OBHC) and the definition of a BHC as a company owning 25 percent or more of the stock of two or more banks. Without these exemptions, the law would have applied to many more financial organizations. Banks later exploited the OBHC loophole as a legal way for banks to acquire nonbanking businesses. The OBHC loophole was plugged by the BHCA Amendments of 1970.

Many of the provisions of the Bank Holding Company Act are no longer in effect because they have been superseded by passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which allows bank acquisitions nationwide and interstate branching, and the Gramm-Leach- Bliley FINANCIAL SERVICES MODERNIZATION ACT of 1999, which allows organizations that can qualify as financial holding companies to enter upon any activities that are financial in nature (as opposed to closely related to banking under the original Bank Holding Company Act). During the period of DEREGULATION in banking during the 1980s and 1990s, and before the Financial Modernization Act was finally passed in 1999, the BHCA was the primary tool employed by the FEDERAL RESERVE to allow liberalization in the banking system. More recently, its importance has faded as the financial services industry has entered a deregulatory stage while the Federal Reserve has adopted a more liberal policy of regulating bank holding companies.