WHAT CAN BANKS DO?

Products and Services

All commercial banks accept deposits and make commercial loans. This intermediation function is a bank's core business. Beyond that, however, banks and bank holding companies may offer other products and services (so-called "nonbank activities"). "Products and services" are also referred to as "powers."

An institution's primary regulator determines what the institution can do. The Comptroller of the Currency makes these decisions for national banks, state bank supervisors decide appropriate activities for state-chartered banks, and the Federal Reserve System determines the activities of bank holding companies. The FDIC monitors state-authorized activities of state-chartered banks to protect insured deposits from unsafe and unsound activities, but has limited authority to intervene directly in the activities of national banks or holding companies.

National Banks

The National Bank Act limits the activities of national banks to those deemed "incidental to its organization." These activities include collecting deposits and making loans; buying, selling and circulating currency; holding real estate; providing fiduciary services; and trading certain securities for clients. The Comptroller of the Currency has discretion to allow other activities that may be considered "incidental" to banking.

Activities authorized by the OCC under this provision include selling credit life insurance; offering banking-related data processing services; issuing credit cards; acting as leasing agents for personal property; warehousing and servicing loans; assisting customers in tax preparation; operating postal substations; acting as payroll issuers; maintaining business records for customers; and providing consulting and auditing services for other banks. National banks can also verify and collect on checks and credit cards for third parties, provide bill payment services, offer economic analysis and forecasts to customers, and develop financial computer software for sale to other banks and customers. National banks in towns of fewer than 5,000 people may sell insurance, and the OCC has recently authorized national bank sales of other uninsured products (e.g., mutual funds and annuities) as well.

The 1933 Banking Acts also known as Glass-Steagall, prohibits national banks from affiliating with commercial firms or engaging in securities activities. Glass-Steagall permits three investment banking activities for national banks: agency activities, restricted purchases for the bank's own account, and free dealing in certain government securities.

State Banks

State-chartered banks that are not members of the Federal Reserve System are generally not subject to Glass-Steagall restrictions. Many states allow their state-chartered banks to offer nonbank products and services to their customers beyond the "incidental" powers of national banks.

The 1991 Federal Deposit Insurance Corporation Improvements Act (FDICIA) generally prohibits state-chartered banks from engaging as principal in activities not permitted for national banks, unless the FDIC determines that the activity poses no risk to the deposit insurance fund. A bank acts as principal when it takes an action on its own behalf, such as investing or underwriting. FDICIA does not restrict state-authorized bank agency activities, in which a bank acts on behalf of a customer (e.g., insurance or real estate sales). FDICIA allowed certain insurance underwriting activities to continue under a grandfather provision, but required divestiture of other activities over a five-year period.

Forty-three states allow their state-chartered banks to offer full or discount brokerage services. Seventeen allow banks to sell real estate, and thirty allow their banks to sell insurance. FDIC approval is not necessary for these activities. Seventeen states allow banks to underwrite securities, which does require FDIC approval, as do real estate equity and development activities, which 27 states permit. Banks in eight states continue to underwrite insurance under FDICIA's grandfather provisions. Thirty-eight states have "wild card" laws, that grant state-chartered banks parity with the powers of national banks.

Many states require or encourage their banks to conduct their nonbank activities through operating subsidiaries, a structure that is available to national banks as well. State supervisors examine and regulate these subsidiaries as parts of their parent banks.

Bank Holding Companies

A bank holding company (BHC) is a corporate structure that owns a bank as its primary business. It may own other subsidiaries (affiliates of the bank) that engage in activities other than banking. The Federal Reserve Board determines permissible activities of these nonbanking subsidiaries based on the provisions of Section 4(c)(8) of the Bank Holding Company Act.

Section 4(c)(8) provides a "laundry list" of permissible nonbank activities for bank holding companies. These include providing services to the bank subsidiaries, such as accounting, advertising, data processing, courier services, personnel services, and underwriting blanket bond insurance for bank employees. Bank holding companies may hold shares of other companies as a fiduciary, and may own less than 5% of the shares of any other company. They may also own the shares of foreign companies that do most of their business abroad, and the shares of export trading companies.

A provision of 4(c)(8) allows the Federal Reserve to approve other nonbank activities that are "closely related to banking." The Fed's Regulation Y lists these activities. Permissible nonbank activities under Regulation Y include consumer finance, credit card, mortgage and commercial financial operations; industrial loan companies; trust companies; financial counseling services; leasing agencies; investment in community development corporations; financial data processing services; bank-related courier services; credit life and home mortgage insurance; money transmittal; management consulting for other financial institutions; collection agencies; tax preparation services; consumer credit bureaus; consumer financial counseling; securities brokerage; government securities underwriting; printing and selling checks; and operating an options trading system.

Bank holding companies with less than $50 million in assets, or operating in towns of fewer than 5,000 people, can sell insurance. The Federal Reserve has also approved bank holding company investments of 5-10% in subsidiaries that underwrite commercial paper, mortgage-backed securities, and municipal revenue bonds.

Trends in Products and Services

Bank products and services have cycled through expansions and contractions over the past century. Before 1933, banks' relationships with other businesses were largely unrestrained. When the Depression struck, many policymakers believed that expanded bank powers -- especially bank securities activities -- were directly responsible for the collapse of the banking system. Whether or not this was the case is still a matter of debate, but the result was Glass-Steagall, which severely restricted ties between banking and commerce.

Since then, state legislatures and federal regulators have gradually moved to broaden the range of permissible activities for banks. This movement has speeded up considerably over the past five or ten years, as the financial markets and customers' needs have changed dramatically. Several states have acted over the past five years to allow new bank insurance powers, and the Comptroller of the Currency continues to allow new activities under the "incidental powers" authority. Since the late 1980s, the Fed has steadily broadened its interpretation of permissible activities under Glass-Steagall to allow limited securities and commercial paper underwriting. This liberalizing trend is likely to continue, as competition within the financial services industry blurs traditional lines between banking and other financial services.