Organizational Freedom for Banks: The Case in Support

In 1996, the Comptroller of the Currency liberalized its regulations governing national bank operating subsidiaries in order to permit such subsidiaries to engage in a wider range of activities, including some that national banks themselves may not conduct. This action prompted vigorous debate and renewed insistence by the Federal Reserve Board that such activities should be conducted through sister companies under a common holding company--and therefore under Federal Reserve Board jurisdiction--rather than through operating subsidiaries of the national bank beyond the reach of the Board. The Federal Reserve Board and its supporters have advanced novel arguments based on a presumed subsidy conferred on banks by virtue of their access to the federal safety net (consisting of deposit insurance, access to the payments system, and borrowing privileges at the discount window). Proponents of this view assert that by requiring a banking group to be organized under a bank holding company, the potential for nonbanking activities to be cross-subsidized by bank affiliates or for the risks of nonbanking activities to spill over and harm the bank will be reduced. This Essay argues that such assertions are logically flawed--insofar as they presuppose that a bank would act otherwise than in its own best interest when dealing with a subsidiary--and fail to give adequate weight to the corporate separateness of bank subsidiaries and the limited liability enjoyed by their shareholders. The debate over organizational structure is in reality a fight among the agencies for jurisdictional supremacy.