Financial Reforms, Obama style.

This is the fifteenth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Loopholes in the BHC Act:  The Bank Holding Company Act, among other things, lays down rules regarding companies that own an insured depository institution.   Whereas the BHCs are subject to consolidated supervision and regulation by the Federal Reserve, and non-banking activity resrtictions of the BHC Act, comapnies owning a FDIC insured thrift, industrial loan company, credit card Bank, trust company, or grandfathered depsitory institution are not required to beomce BHCs.

The result of the above was that, some investment banks and insurance companies were able to obtain access to the Federal safety net by tactically owning depository institututions not considered as Banks.   That apart, they were also able to escape more stringent regulation and restrictions on their non banking activity.   They were also emboldened to leverage their off balance sheet exposures without adequate capital support.

Supervision of such firms became difficult on account of the complexity of their operations and indeed their structures.

The proposed reforms package would eliminate the different supervisory and regulatory regimes for thrifts and the BHCs, that have provided arbitrage opportunities to the Banks.

The Industrial loan companies have become vehicles of commercial activities by financial firms on account of their FDIC  affiliation that offers them the federal safety net.   By owning such ILCs, commercial firms were avoiding provisions of the BHC Act.   Under the reforms package, the holding companies of ILCs would become BHCs.

Credit Card Banks also enjoy exceptions under the BHC Act.   And as such have become targets of financial firms to take advantage of leverage opportunities they offer to the parent company.

Trust companies, though, do not receive federal benefits on par with ILCs or credit card Banks, they also offer scope to financial firms in the same manner though on a smaller scale.

Under the new financial regulatory regime, holding companies of NBB would also become BHCs.

                                                                                         To be concluded.