A comparative analysis of the US and EU retail banking markets - Wsbi

The market share of the US banking market of
commercial banks in terms of total assets at the end
of 2003 was 78% 8 .
3.2.1.1.2.2 Ownership structure and activities
The ownership structure of choice for US commercial
banks, which is that of the bank holding company,
is directly linked to the activities that banks were
permitted to perform. For this reason, we speak of
ownership structure and activities in the same section.
In practice, commercial banks can be independently
owned by private investors (stockholders) or by bank
holding companies. The vast majority of commercial
banks in the US today are owned by bank holding
companies. These are corporations or other entities
that own a majority of stocks or securities of one
(one-bank holding company) or more (multi-bank
holding company) banks, thus obtaining control of
the other corporation(s). Bank holding companies
own nearly all – 97% – of the insured commercial
banks by assets 9 .
The bank holding company form of ownership
became increasingly attractive to commercial banks
in response to restrictions on the scale and scope of
banking. On the liability side, commercial banks
were limited in terms of the types of liabilities they
could issue and the rates they could pay depositors.
They were generally relegated to the business of
making (primarily) business loans and providing
transaction accounts (or close substitutes) in fairly
localised areas.
This stemmed from the Acts put in place in the US to
keep the businesses of commercial banking and
investment banking strictly separate: the Glass-
Steagall Act of 1933, which prohibited banks from
engaging directly or indirectly in the underwriting of
or dealing in securities, and the Bank Holding
Company Act of 1956, which prohibited banks from
affiliating with insurance underwriters and nonfinancial
firms. Thus, for investment banking and
insurance services, individuals and corporations had
to go to other financial-service providers.
After these prohibitions gradually eroded because
of decisions by regulators and courts as well as
market place practises, Congress passed the Gramm-
Leach-Bliley Act (GLB) that further blurred those
distinctions by facilitating financial sector combinations
and regulatory change in November 1999. The GLB
repealed Sections 20 and 32 of the Glass-Steagall
Act which prohibited affiliations between banks and
securities firms and amended the Bank Holding Act.
Under the GLB banks and securities firms continue to
be prohibited from directly engaging in each other’s
business. However, the GLB created a new form
of bank holding company, the financial holding
company, which is allowed to engage in an
expanded range of activities.
The expanded permissible activities for these holding
companies include securities underwriting and dealing,
insurance agency activities and insurance underwriting,
acting as a futures commission merchant, and merchant
banking (‘financially related activities’). The Federal
Reserve Board and the Secretary of the Treasury have
the authority to determine whether other activities
are financial in nature or incidental to financial
activities and hence permissible for these holding
companies to engage in.
Furthermore, a financial holding company may engage
in any non-financial activity if the Federal Reserve
Board determines that they are complementary to a
financial activity and do not pose a substantial risk to
the safety or soundness of depository institutions or
the financial system (‘complementary activities’).
Thus, financial holding companies are simply a subset
of bank holding companies that are authorised to
engage in an expanded range of activities.
Commercial banks can therefore become affiliates of a
larger banking organisation, including also non-bank
financial firms as affiliates 10 , thereby allowing the
holding company to expand the scope of its activities
into areas not permitted to independently owned banks.
Using the holding company form of organisation
therefore allows bankers to diversify their product
lines and offer services requested by their customers
and provided by their European counterparts.
8 ESBG calculation based on figures from the Federal Deposit Insurance Corporation (FDIC) and the Credit Union National Association (CUNA).
9 From remarks by Governor Mark W. Olson at the Fortieth Annual Conference on Bank Structure and Competition, Sponsored by the Federal Reserve Bank of
Chicago, May 6, 2004.
10 Section 4 (c) of the Bank Holding Company Act provides a "laundry list" of permissible interests of bank holding companies in non-bank activities. 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. Furthermore, section 4(c)(8) of the Bank Holding
Company Act empowers the Board of Governors of the Federal Reserve System to approve other non-bank activities that are "closely related to banking",
such as for instance the provision of: consumer finance, credit cards, mortgage finance, financial counselling, securities brokerage, government securities
underwriting, printing and selling checks.
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