Nonbanking Performance of Bank Holding Companies: An Update from 1986–1990

Abstract

There is an ongoing controversy over whether or not to extend commercial banks' nonbanking powers. Although the Glass‐Steagall Act of 1933 and the McFadden‐Pepper Act of 1927 restrict commercial banks' activities, the technological and financial innovations of the last several years have raised new questions. Whether banks should be allowed to undertake nonbanking activities? How profitable are these businesses? Whether banks will gain monopolistic powers? Will they increase FDIC's liabilities? And several other related questions. This study looks at the nonbanking activities of bank holding companies using a relatively new data source, i.e. FR‐Y11AS reports for the years 1989 and 1990. The performance of nonbanking subsidiaries is then compared with that of commercial banks and bank holding companies. Some meaningful inferences are drawn on issues such as market concentration, profitability, capitalization, and level of problem‐loans of nonbanking and banking subsidiaries, as well as, consolidated bank holding companies. Results from two prior studies are further utilized to look for possible trends. Since these studies have used the same data source (FR‐Y11Q and FR‐ Yl1AS) for the years 1986 through 1988, this facilitates a trend analysis over a five year period 1986–90. The main conclusions are that the BHC's nonbanking activities are heavily concentrated among the top five or ten firms within each activity. However, both the number of firms as well as total assets held in most nonbanking subsidiaries have declined over the five year period. Activities considered traditional, e.g. commercial and consumer finance and mortgage banking have suffered significant losses in terms of total assets and number of firms. Some interesting conclusions can be drawn from these results. First, due to the growing liberalization in interstate banking laws, BHCs can now carry on these activities in their bank subsidiaries and do not have to acquire a nonbanking subsidiary in order to capture business across state lines. Second, the glass walls separating banking from commerce may be cracking. Several states have started allowing banks to carry out some of the nonbanking activities, hence, considerably neutralizing the Glass‐Steagall Act. Insurance agencies and underwriting business of BHCs show the most significant growth over the five years, 1986–1990. Securities brokerage has held constant. Another finding is that the return on equity (ROE) for nonbanking firms has been lower than both the banking firms as well as the BHCs. However, this is mainly due to the relatively low equity capital levels for banks and BHCs. The nonbanking subsidiaries show fairly stable and relatively high capital ratios. Finally, for most part, nonbanking subsidiaries have a higher rate of problem‐loans.

Citation

Saxena, A.K. (1996), "Nonbanking Performance of Bank Holding Companies: An Update from 1986–1990", Managerial Finance, Vol. 22 No. 8, pp. 57-75. https://doi.org/10.1108/eb018577