This post addresses the end of the Dodd-Frank Act moratorium on the ability of “commercial firms” to acquire FDIC-insured banks that are excluded from the definition of “bank” in the Bank Holding Company Act: industrial banks (or “ILCs,” as they are commonly labeled) and credit card banks. The moratorium, set forth in section 603 of the Dodd-Frank Act, ended on July 21, 2013, and it is now again legally permissible for any type of company—retailer, manufacturer, or any type of nonfinancial firm—to seek to acquire or establish such an FDIC-insured bank.

Federal law has contained provisions expressly permitting any type of company to control an ILC or credit card bank for decades, but the Federal Reserve Board and, more recently, the FDIC have expressed policy concerns with the control of insured banks by commercial firms. The Dodd-Frank moratorium followed a similar moratorium on approvals for an ILC to be controlled by a non-financial firm, which the FDIC implemented in 2006-2008 and then continued de facto after it formally ended. We understand that at least three applications filed before the beginning of the FDIC moratorium were not acted on even though the moratorium did not apply to them. Section 603 of Dodd-Frank reflected the same policy concerns, but it has now expired, and the underlying provisions of law permitting control by commercial firms remain in effect.

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On July 19, 2013, Barbara Hagenbaugh, a spokeswoman for the Board of Governors of the Federal Reserve System (Federal Reserve) made the surprising announcement that the Federal Reserve “is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.” The statement, upon which the Federal Reserve did not elaborate, seems to call into question the physical commodities trading activities (Physical Commodities Trading) that certain financial holding companies (FHCs), both domestic and foreign, have engaged in for the better part of the last decade.

This post describes the justifications for the original Federal Reserve conclusion that, under Section 4(k) of the Bank Holding Company Act of 1956 (BHC Act), Physical Commodities Trading is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. It then analyzes these justifications in light of the current state of the financial system and enhanced regulatory environment, which support the conclusion that the Federal Reserve’s original view of Section 4(k) continues to be a reasonable interpretation of the statute.

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On April 15, 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC) issued additional guidance (Guidance) with respect to the 2013 resolution plan submissions of the U.S. and foreign banking organizations that filed their initial resolution plans on July 1, 2012 (First-Round Filers).

The Guidance shows that the Federal Reserve and FDIC are intensifying their credibility review of resolution plans, requiring analysis of the most challenging issues raised by a Covered Company’s failure. Responding to the Guidance will require First-Round Filers to address head-on difficult questions raised by their original submissions. In recognition of the amount of new information required to be supplied, the Guidance extends the 2013 submission date for First-Round Filers to October 1, 2013.

Although by its terms the Guidance is limited to the plans of the First-Round Filers, it suggests that banking organizations in the second and third filing rounds may be required to undertake more searching analysis in their submissions next year.

In this post, we discuss the most significant aspects of the Guidance:

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Treasury officials have recently suggested that the Financial Stability Oversight Council (FSOC) may soon designate the first round of systemically significant nonbank financial companies (Nonbank SIFIs). In March, Under Secretary for Domestic Finance Miller and Deputy Assistant Secretary for the FSOC Gerety stated that designations could occur “in the next few months.”

Moreover, the Board of Governors of the Federal Reserve System (Federal Reserve) recently finalized its rule on determining when a company is “predominantly engaged in financial activities,” thus making the company potentially subject to FSOC designation. The final rule is notable for stating that an investment firm that does not comply with the Merchant Banking Rule’s investment holding periods and routine management and operation limitations may nonetheless be determined, on a case- by-case basis, to be engaging in “financial activities.” In addition, the final rule rejected the argument that mutual funds — including money market mutual funds — are “not engaged in a financial activity” and therefore not capable of designation.

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