The Regulation and Supervision of bank Holding Companies: An Historical Perspective

Scholars have generally concluded that the assigning of the BHC responsibilities to the Fed in 1956 was primarily based on the historical precedent of the Clayton Act and the Banking Act of 1933 which granted some powers to the Federal Reserve with respect to bank holding companies. This explanation is not sufficient because bank holding company bills had been introduced since 1930 and it is only after 1943 that the Federal Reserve is designated as the regulatory agency for BHCs. Why was there a change? There are three factors which together explain why the Federal Reserve was selected as the regulatory agency. The first, and probably most important, was in the legislative response to the public outcry over the abuses of bank affiliates. The bank affiliates and holding company issues were intertwined, and the outcome of the Banking Act of 1933 had important implications for the future regulation of BHCs. If the separation of commercial and investment banking had not occurred, the OCC would quite likely have been the regulatory agency for BHCs. It was recognized that a system of universal banking (national banks with addiliates) required a single regulator. Second, legislation proposed by Marriner Eccles and the Federal Reserve in 1943 to control BHCs specified the Federal Reserve as the regulatory agency, despite the fact that at the time there was little rationale for this. However, the bill introduced in 1943 became the BHCA of 1956. Third, the Comptroller of the Currency in 1956, Ray Gidney, believed that BHCs promoted efficiency in banking and needed little regulation. Those members of Congress who believed that BHCs should be tightly controlled, or abolished, had little incentive to entrust the regulation and supervision of BHCs to Gidney. If the comptroller of the Currency at the time had been a strong opponent of the expansion of BHCs, then there might have been reason to change the legislation. A reexamination of the reasons for granting regulatory power over BHCs to the Federal Reserve is of direct policy relevance today: Should we retain our multiagency regulatory structure if the U.S. moves toward some form of universal banking? The history of bank holding company regulation provides guidance in answering these questions.