Organizational Form and Risk in Bank-Affiliated Mortgage Companies: Note

Abstract

Although the Bank Holding Company (BHC) Act of 1956 restricted the nonbanking activities of registered multibank holding companies, federal regulation of BHC nonbanking activities expanded significantly when the act was amended in 1970. Most importantly, the 1970 Amendments brought one-bank holding companies, many of which had actively expanded into nonbanking activities during the late 1960s, under Federal Reserve regulation. In addition, the amendments broadened the Federal Reserve Board's authonty to determine which nonbanking activities would be permissible for BHCs. From 1971-79, the Federal Reserve Board permitted 19 nonbanking activities for BHCs and approved over 4,500 BHC applicants to engage in these activities. Interestingly, most of these so-called nonbanking activities are also permissible to national banks. Two principal considerations appear to explain the pattern of establishing traditional banking activities in BHC nonbank subsidiaries, rather than organizing the activities within the bank(s) of the BHC. First, BHC nonbank subsidiaries are generally exempt from geographic branching restrictions. Second, until perhaps recently, nonbank subsidiaries have generally been subject to less-intensive federal supervision than banks, as evidenced by the frequency of federal examinations. While insured banks have long been subject to annual or biannual examination by the bank's primary federal regulator, such frequent inspection of nonbank subsidiaries of BHCs was not instituted until 1978.12