Written by Samuel Phineas Upham

The financial industry is largely defined by the regulations it must deal with on a daily basis. Banks are able to stay afloat based on how well they adapt to increased regulation, and how they manage to sidestep rules they find unfavorable. Typically, these loopholes are closed by new regulation, but the business model is built on the idea that a bank must factor in the risk of regulation.

Prior to the Holding Company Act, retail banks largely didn’t exist. Banks were rarely allowed to trade between states, and it was believed that bank branching would kill competition amongst banks. Some traders felt that big banks would consolidate financial power in the face of competition.

Of course, banks could form a chain of banks that would allow them to skirt this rule. Because bank holding companies were owned by groups, or groups of individuals, they were able to open independent branches. The concern came when these same institutions were allowed to own non-banking entities. The Fed was concerned that these banks had an unfair advantage because they could simply lend themselves out of any troubles they faced.

The Bank Holding Company Act helped to define those independent banking entities and provide some rules to regulate them. After 1956, a holding company was any company that held a stake of 25% or more of a particular institution. The law also defined a bank as any institution that took deposits and made loans.

In a broad sense, the act provided some oversight to the Fed. Previously, banks were able to incorporate and buy whatever they chose. After the Bank Holding Company Act, banks had to register with the Fed and submit paperwork prior to a merger. The act did have some important loopholes that needed closing, but it was a step in the right direction for consumer protections.

Samuel Phineas Upham is an investor from NYC and SF. You may contact Samuel Phineas Upham on his Samuel Phineas Upham website