Activity Restrictions for Banks as Prudential Regualtion

Why restrict bank's permissible activity?

● Limit risk, and exposure of FDIC fund.

● Subtle hazards to bank
○ Reputational risk
○ Imprudent lending risk
● Non-prudential reasons
○ Restrict bank power
○ Make credit available without prejudice
○ Rent seeking by non-banks

Activity restrictions for banks:enumerated and incidental powers

● Enumerated (National Banking Act)

○ Deposits, loans, investment in high-quality dept, broker securities for customers
● Incidental
○ Activities that are "convenient and useful" in accomplishing enumerated powers.
○ Chevron Deference to OCC and Fed
■ Travel agency? No way.
■ Leasing personal property? Permissible so long as it's secured lending.
■ Brokering variable annuities? Permissible. They're like bank accounts.
● Specific prohibitions
○ Can't own real property, except for foreclosed homes and operations.
○ Prohibition on owning stock for own account
○ Allowed to be a broker, not a dealer
○ Cannot underwrite securities
■ Exception for general obligation bonds of gov and private placement of
commercial paper
○ Can't sell insurance, but can be an agent in small towns.
■ VALIC defers to OCC that banks can sell arable annuities because not
insurance.
○ Cannot underwrite insurance
■ Exception for credit insurance (just canceling bank's own loan)
■ Retirement CD/Annuity? Blackfeet v. Nelson

BHCs

● Bank = any company that "controls" a "bank"

○ Control = >25% ownership
○ Doesn't include credit card bank
● Activity Restrictions
○ Banking and activities closely relate to banking that provide a public benefit
○ Ex/ appraisal, trust company, collection company, broker, investment advisor
Gramm leach bliley makes it possible to go from bhc to fhc. Then can do:

● Any financial activities or activities complementary or incidental thereto

● Investment banking, insurance underwriting, merchant banking, private equity

Volker Rule

How are credit card banks financed?