Can Anyone Own a Commercial Bank?

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This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.

By virtue of a very active and deep stock market in the U.S., many people own shares of bank stock. In most cases, these shares are held in publicly traded banks—many of which are large in size. Because smaller banks are often not publicly traded, stock in those institutions is typically purchased directly from the seller. Buyers of the stock of smaller banks are often the banks’ directors, officers and community members.

Ownership of significant holdings of bank stock requires approval of federal (and sometimes state) regulators. The regulatory approval requirements differ, depending on whether the stock is owned by an individual or a corporation.

Individual Ownership

Individuals commonly buy shares of bank stock either directly or through fund managers. Regulations permit such purchases until the ownership level of an individual reaches 10 percent of the outstanding shares of any class of securities.

To go beyond 10 percent, the purchaser must complete certain regulatory requirements, including the provision of biographical information and a demonstration of financial capacity. Regulators then run a background check to assess that person’s character. A felony conviction, for example, would disqualify an individual from moving over the 10 percent ownership threshold.

Other factors that would raise issues include a less-than-honorable discharge from the military, adverse comments made by bank regulatory agencies or other factors that raise concerns with respect to the purchaser’s competence or integrity. Moreover, the individual must prove the financial capacity to fund the stock purchase without excessive reliance on dividends from the bank itself.

Corporate Ownership

Sometimes, individuals wish to use funds residing in other companies they own to purchase bank stock. These companies include traditional corporations, business trusts and certain partnerships.

If a planned stock purchase exceeds 25 percent of any class of voting securities—and sometimes less—the purchasing company is proposing to acquire “control” of the bank and must submit an application to federal regulators. Control of bank stock triggers a number of federal statutory requirements that regulators must consider, including assessment of:

• Competition, convenience and needs: In short, the applicant must show that it/they will meet the credit needs of the community once the acquisition is complete and that the transaction will not create a monopoly in one or more banking markets.
• Financial and managerial resources: The applicant must demonstrate that it/they have the financial and managerial resources to allow the organization to prosper.
• Ability to combat financial crimes: The applicant must demonstrate that it/they can implement effective policies to combat money laundering and other financial crimes.See last month’s blog post, “What Is the Bank Secrecy Act, and Why Does It Exist?,” for information about banks’ responsibilities for fighting financial crimes.
• Financial stability: The applicant must demonstrate that the proposed merger will not adversely affect the stability of the U.S. financial system.

If the acquisition of shares is approved, the acquiring company becomes a bank holding company (BHC). Federal laws restrict the operations of BHCs to those that are financial in nature or incidental to a financial activity.

For example, BHCs can provide real estate appraisals and escrow and settlement services. However, they are not permitted to engage in real estate brokerage services or activities that are commercial in nature.

In addition, they generally are prohibited from underwriting insurance and certain securities.A BHC operating in a town with more than 5,000 people generally cannot sell insurance. However, if the holding company elects to become a “financial holding company,” it is not subject to this restriction. These limitations explain why a retail business or a hedge fund cannot acquire control of a bank.

Exceptions to the Rule

There are a few exceptions to these limitations on ownership of bank stock. Some involve grandfathering rights, while others are due to unique provisions in law.

In a previous post, I discussed industrial loan companies (ILCs).See “Fintech Interest in Industrial Loan Company Charters: Spurring the Growth of a New Shadow Banking System?” for more information about the ownership of ILCs and their advantages and disadvantages as financial institutions. An ILC, like a bank, takes deposits and makes loans. However, ILCs cannot offer demand deposits. For that reason, they do not fit the definition of a “bank” under law and thus can be owned by commercial businesses. ILCs have been in the news lately because of the application by Square, a financial technology company, to acquire an ILC.

Also of interest are specialty government-owned banks. These entities are limited in number and purpose, with the Bank of North Dakota (BND) serving as the best known example.

BND, as well the newer Territorial Bank of American Samoa, are uninsured institutions formed for unique purposes. For that reason, they do not operate as traditional banks, but they do remain subject to certain banking regulations and regulatory reviews. Their government owners are not defined as “companies” under the Bank Holding Company Act.

In summary, small ownership interests in banking organizations are common, and these shareholders are treated like those in any other commercial organization. Large stock purchases, however, require regulatory approval. The purpose of the regulatory review is to promote the continued safety of the insured banking system.

Notes and References

¹ See last month’s blog post, “What Is the Bank Secrecy Act, and Why Does It Exist?,” for information about banks’ responsibilities for fighting financial crimes.

² A BHC operating in a town with more than 5,000 people generally cannot sell insurance. However, if the holding company elects to become a “financial holding company,” it is not subject to this restriction.

³ See “Fintech Interest in Industrial Loan Company Charters: Spurring the Growth of a New Shadow Banking System?” for more information about the ownership of ILCs and their advantages and disadvantages as financial institutions.

Additional Resources

• On the Economy: What Is the Bank Secrecy Act, and Why Does It Exist?
• On the Economy: Fintech Interest in Industrial Loan Company Charters: Spurring the Growth of a New Shadow Banking System?