WASHINGTON – Forcing owners of narrow-purpose banks to become bank holding companies could cause certain institutions to dissolve, but have a relatively minor impact on the industry at large, a government report said Friday.
The Dodd-Frank Act did little to resolve concerns over a legal exemption allowing commercial firms to own banks. But the 2010 law did require the Government Accountability Office to study the implications of ending the exemption.
"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," the GAO report said.
For decades, most bank parents have been required to file as bank holding companies, which are barred from non-financial activities. But certain categories of institutions are exempt, including industrial loan companies, firms that owned thrifts before 1999 and limited-purpose credit-card banks.
That exception has led to years of controversy over fears that large retailers have a back door into banking, stoked by multiple attempts by Wal-Mart Stores Inc. to own an ILC. Wal-Mart withdrew from its last bid in 2007, but legislative efforts to broadly restrict commercially owned banks have failed. Dodd-Frank included a moratorium — ending in 2013 — on new bids by commercial parents to get deposit insurance.
While the report found that commercial firms would rather get rid of a bank subsidiary — if the exemption were removed — than end their commercial activities, some regulators told the government watchdog that certain risks from the exemption remain.
"Some officials from exempt institutions said that financial stability could be adversely affected by further concentrating market share," the report said. "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."
