What Are Permissible Non-Bank Activities?
Permissible non-bank activities are lines of financial business that can be conducted by bank holding companies or financial holding companies (FHCs), but not by traditional banks because they are deemed close enough to banking to be acceptable by the regulators. Bank holding companies can either engage in the businesses directly or through subsidiary firms.
Common examples of permissible non-bank activities are ownership or operations in consumer finance and brokerage services. The Federal Reserve, the U.S. regulator of bank holding companies, must review the intended non-bank businesses before the companies are allowed to offer them.
- Permissible non-bank activities are a set of functions that financial holding companies can engage in, but which traditional banks cannot.
- These include activities like insurance underwriting, securities dealing, and investment advisory or brokerage services.
- Financial holding companies that can perform these activities are seen as a "one-stop-shop" for financial services.
How Permissible Non-Bank Activities Work
Traditional bank activities include taking deposits; making personal, home (mortgage), and business loans; and offering check-writing, safety deposit, savings, and bill paying services. Over the progression of the banking industry in the last few decades, a number of services outside the traditional core set of activities have developed to serve customers.
Bank holding companies have sought to become "one-stop shops" for their customers, who are confronted by a proliferation of new products and services. These activities may be permissible because they are tangential and perhaps even synergistic with core banking services.
Citigroup, Capital One, JPMorgan Chase & Co, T.D. Bank, and Bank of America are all operated by holding companies. As a result, they are able to offer various non-bank activities to their customers.
Benefits to Both Bank and Customer
Non-bank activities permitted by regulators produce more revenues for a bank. A majority of revenues come in the form of net interest margin, but a material portion is derived from fees and commissions on non-lending activities. This type of revenue helps to add some ballast to a bank's operations throughout interest rate cycles.
As alluded to above, the customer has an option to organize her financial life under one roof. Also, by dealing with a single bank, she will likely benefit from reduced or waived fees or preferential interest rates on loans. A financial company may also offer certain deals or promotions to encourage existing customers to sign on for additional non-bank services, such as receiving an interest bonus in their bank accounts by opening a brokerage account or buying insurance.
Example of Permissible Non-Bank Activities
For example, let's say a consumer has a checking account at a bank. The institution may offer her a certificate of deposit (CD) account as an element of the individual's overall savings plan along with a brokerage account that the bank can offer to her. These offerings are additional permissible non-bank activities.