What Is a Non-Bank?

I’ve read the NYT and WSJ articles, and the prepared testimony by Bernanke and Geithner, and I have a very basic question. Bernanke and Geithner said they needed new power over “systemically important nonbank financial firms” or “large, interconnected, non-depository financial institutions” or, most simply, “non-banks.” This is to complement the FDIC’s existing power to take depository institutions (“banks”) into conservatorship.

Are bank holding companies “non-banks,” which happen to have “banks” as subsidiaries? If so, the legislation they are asking for should make it easier to nationalize a large, complicated thing (I don’t know what to call it anymore, but you know what I mean) like Citigroup. Various people arguing against nationalization have said that while the government has the power to take over the depository institutions within Citigroup, it can’t take over the umbrella entity; this would eliminate that problem.

If so, I would call that a good thing. But I can’t find the answer.

Update: Thanks to the commenters. And to Yves Smith. So the Fed has regulatory authority over bank holding companies (that bit I already knew), but there is no defined process similar to what the FDIC does for taking over and winding down failing institutions.

23 thoughts on “What Is a Non-Bank?

  1. This plan sounds like a place holder.

    If we believe that our government never had the authority to take over Citi ( and Goldman, and maybe Morgan without the free money givaway from AIG, and TARP 1) then this takes away the look of self-dealing that has come to the publics awareness.

    Also, when the number of trillions laundered to the banks get so high that officially the USA is bankrupt, this authority will step in like a patsy….

    I just dont buy that there was no authority–authority never stopped any action when the action was desired…so, if the honest dealing with insolvent entities was the goal, this would have happened in September of 2008.

  2. BHCs are non-banks that have banks and other businesses as subsidiaries. But the Fed already has authority over BHCs, and the Comptroller of Currency regulates the subsidiary banks. Between the Fed and Comptroller, there is arguably no need for any new legislation to effectively nationalize Citigroup and other BHCs.

    What the legislation seems to be asking for is authority over other unregulated non-bank and non-BHC financial companies that could pose serious risk to the general economy. A primary example is obviously AIG, but there is room to speculate about others, GE for example has a large financial unit in GE Capital and also has long tentacles that reach deep into the general economy. You might also speculate that the legislation is seeking greater authority over hedge funds.

  3. I always find it kind of amusing when the pointy-heads and establishment types take Potemkin proposals like this and treat them as anything other than the window dressing they are.

    This is just the WH spin-doctors cooking up a little sweetener to help the latest trillion down the throat of the taxpayers.

    This proposal has a much chance of getting through Congress as the AIG bonus clawback and the Employee free Choice Act!

  4. Yeah, non-Bank that has tentacles deep into the economy… hmm. IBM? GM? Dell? Apple? Microsoft? ToysRUs? GE? Hedge funds? Seems like passing this would allow the Fed to take over any business they wanted to. What’s the gating factor?

  5. A “bank” is a statutorily defined term: institution that (a) accepts demand deposits and (b) is engaged in the business of making commercial loans. 12 USC 1841(c). By law, banks are regulated by the alphabet soup of entities, depending on the institution that granted their charter: OCC, OTS, FRB, or the 50 state regulators.

    Non-banks are simply financial intermediaries that don’t perform those two statutory acts, e.g. AIG, HIG, GE Financial, etc. For many of these institutions, even those posing systemic risk, there is no functional regulator, of if there is one, the regulator is way in over its head (e.g. New York Insurance Commissioner regulating AIG).

    A bank holding company is defined under 12 USC 1841(a) and is simply a company that has “control” of a bank. All BHCs and FHCs are regulated by the FRB at the organizational level, but regulated by different regulators at the functional level (e.g. SEC would regulate the investment bank subsidiary of the FHC).

    There are also non-bank banks, but no need to go there =)

  6. You don’t need a permanent, standing procedure to deal with rare, unique situations. You just need to go before Congress, explain your case in clear terms and get authorization for the special situation.

    Let’s try that sometime. It would be unique and refreshing.

  7. I still do not understand what is so bad (disorderly) about bankruptcy court for the allegedly systemically risky. Would it not be better to have a well established system of bankruptcy to “resolve” failed firms?

  8. Disbelief (and denial)–the first stage in grief when one realizes they have been had.

  9. The problem is determining which part of the institution is failing. For example, if the problem within C is the deposit institution, then the OCC can legally shut down the N.A., and the FDIC can unwind. The problem would be if an investment bank subsidiary, to either the N.A. or the FHC, were toxic. Under GLBA, the investment bank sub is regulated by the SEC, which doesn’t have “unwinding” capabilities. The proposed legislation would fix this problem. Further complications could arise for a nationalization of C, because unlike in a true holding company structure (e.g. Berkshire Hathaway), the constituents of a FHC (especially the financial subsidiary) often “share” capital.

  10. AIG is a non-bank. While under some control of the NY State Insurance Commission, being international, there should be some more specific and larger regulating agency to unwind it. This also sounds like an introduction of a back up plan for AIG and similar and other non-banks. An insurance company in a given state goes into receivership, called resolution I believe. AIG is under so many intenational jurisdictions some clear-cut authority to hold its reserves (such as they may be) for the benefit of benificiaries is necessary if not more than a little late. While the Federal Reserve stepped into this role with bailouts, the authority to stop outflows of cash logically has to come from somewhere. I guess the Fed funding AIG does not also grant that conservatorship authority.

    A non-bank is an the entities that grew of out the gaping regulatory cavern of the last decade or more. If we knew what it was,we would have had a proportional regulatory body. Now that we have begun to identify what a non-bank is we can start closing in to regulate it. I own a company that is very closely regulated. It takes a lot of my staff time to respond to the regulations and ensuing taxes that follow regulation. My industry is too vital to public interest to escape regulation. I have seen my own industry be perverted by the relaxing of regulation in the last eight years. There are entities in my industry that will make their way to the chopping block for having again become a monopoly. Too big is always out of touch, be it industry or government. The non-banks not only need rigorous regulation but serious downsizing.

  11. Am I the only one suffering paranoia, as a result perhaps of the Bush years, or does this proposal seem to be coming out of left field and a power grab? The plan was proposed by a man in whom we have not come to have confidence, Treasury Secretary Tim Geithner, one with a questionable background in terms of his complicity in the failing of Lehman, the rescue of AIG, et all, connections to Goldman Sachs, and then there’s the minor oops of failing to pay his Federal income tax.

    Additionally, this proposition is put forth without any mention that I’m aware of regulations, oversight or transparency of the very investments that got us into this mess. Wouldn’t one think new rules and regulations would be at the top of the list of ways in future to deal with these non-banks?

    Bottom line is that I’m not feeling comfortable with any of this proposal. As someone asked above, what’s the back stop? So any Treasury Secretary can just go in and close down a business because of “systemic risk?” Again, Geithner tosses out a program without details.

  12. Maybe I’m being overly optimistic, but it seems as if this new authority also provides the proper incentive for the banks to fully participate in Geithner’s public-private plan to buy toxic assets. One of the issues I believe people have raised is that the banks don’t have any incentive to participate if the prices offered aren’t high enough. It seems now they have the incentive to play regardless of what prices are offered because if they don’t they risk being shut down later on for not cleaning up their books properly.

  13. – and whether private universities may be added to the list, given recent concerns about endowments, enrolments and student loans.

  14. “thing (I don’t know what to call it anymore, but you know what I mean)”

    “Thing” is a good word if nothing else applies, but as Tai Nguyen alludes to above, all of these “things” are corporate entities of one form or another, and owe their existence to some part of the USC or state codes. Which suggests a way to play hardball, if the Feds need to:

    Require each “thing” to show what part of the USC is it operating under – no more of the shadow financial arguments, “well, CDSs aren’t really insurance, so we don’t have to follow the insurance regulations.” If they can’t do this, they don’t exist legally, with all the consequences (true hardball: their existing contracts are void). Once they do say what they are, apply all the regulations, retroactively if necessary.

  15. I’m glad that they are seeking FDIC-like authority for bank holding companies. I certainly advocated for some form of receivership for insolvent institutions in my paper “The Put Problem with Buying Toxic Assets” at http://ssrn.com/abstract=1343625. It is better to buy the toxic assets in receivership than outside of it.

  16. Tai et al,

    Could you please help me understand something. I know that Fannie/Freedie were taken into conservatorship and what is different between whatever authority that allowed this conservatorship verses the alleged lack of authority for doing the same with AIG?

  17. If anyone has a question about how such legislation might (or might not) work, the best source for accurate, thoughtful analysis of U.S. banking law and regulation is Michael Malloy, a professor at McGeorge School of Law. Professor Malloy has authored numerous textbooks, treatises, and law-review articles on the subject, and is considered a leading expert on the intricacies and vagaries of U.S. and international banking law. Here’s a link to his CV:

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