Nonbanking activitiesof bank

holding companies

Although bank holding companies (BHCs)have existed for over three-quarters of a cen-tury, their impact on the banking and finan-cial sectors has become significant only in thepast decade. , Prior to 1971 BHCs were dividedinto two basic types, multibank and one-bankholding companies. Multibank holding com-panies (MBHCs) were defined as corporateentities controlling at least 25 percent of theownership of two or more banks and since1956 have been required to register with theBoard of Governors of the Federal ReserveSystem. Historically, MBHCs have been usedlargely to circumvent intrastate and interstatebranch banking prohibitions, but in recentyears they have been expanding into non-banking areas.

One-bank holding companies (OBHCs),on the other hand, have had a more variedhistory. Originally, OBHCs were organized byfamilies or individuals to control small bankswhile at the same time gaining certain tax ad-

1 The historical and legal development of bankholding companies has been traced in several articles inBusiness Conditions [22, 29, 30]. The banking aspects ofmultibank holding companies were surveyed in theDecember 1976 issue [9].

vantages offered by incorporation. In otherinstances large nonfinancial holding com-panies would acquire a bank to facilitate theavailability of banking services for theircustomers and employees. This latter type wasfrequently referred to as a "conglomerate"bank holding company [22, 25, 29].

About a decade ago, however, a distinctchange occurred in the rationale behind theformation of OBHCs. This marked phe-nomenon was the bank-originated OBHC,whereby the holding company was formed atthe initiative of the bank itself. By so doing,the bank holding company could diversifyboth the range of financial activities it couldperform and the geographic area it served.Prior to the 1970 amendments to the BankHolding Company Act of 1956, OBHCs wereneither required to register with the Boardnor were they subject to the act's restrictions.Many of the activities performed by OBHCs,though financial in nature, were activitiesprohibited both to banks per se and to

NOTE: Numbers in brackets [ ] refer to the numericallylisted bibliography on pages 20-21. Citations are either tostudies the results of which are described in this article orto scholarly elaborations of topics discussed.

12 Economic Perspectives

registered (multibank) holding companies.The term "congeneric" has frequently beenapplied to this form of BHC [22, 25, 29].

The rapid growth of OBHCs and theirtendency to acquire nonbanking businessenterprises raised the spectre of the Zaibatsu(large multi-industry combinations commonin Japan) dominating the American economyand threatening the traditional separation ofbanking from commerce. The logic of allow-ing banks to perform functions indirectlywhich they could not perform directly wasquestioned. In addition, the combination ofbanking with related nonbanking activitiescould produce anticompetitive effects. Theseconcerns precipitated the inclusion ofOBHCs into the act via the 1970 amendments,which restricted OBHCs to the same range ofactivities permitted MBHCs and also liberal-ized the criteria for determining the per-missibility of new activities.

This article presents, in light of economicanalysis and empirical evidence, the issuessurrounding BHC entry into nonbanking ac-tivities. These issues include the permissiblenonbanking activities, diversification, risk andthe soundness of BHCs and the bankingsystem, concentration and competition,operating efficiency, and pricing andprofitability. Unfortunately, however, theempirical evidence available to decide theissues is scanty because (1) nearly all attentionheretofore has been focused on the bankingaspects of MBHCs; (2) the gathering andanalyzing of data from affiliated nonbankingsubsidiaries is extremely costly; and (3) datafrom nonbanking, nonaffiliated firms op-erating in nonbanking activities are verylimited, thus making meaningful comparisonsdifficult.

Permissible activities

The list of permissible nonbanking ac-tivities for BHCs (see table) has increased onlyslightly during the last two years 2—one newactivity was approved, while five proposed ac-

2 The regulatory status of nonbank activities as ofFebruary 1975 is given in [30, pt. 1, pp. 3-6].

tivities were denied and two were placed"under consideration." There are apparentlythree reasons for the slackening. To beginwith, the Board has adopted a "go slow"policy toward all BHC expansion, includingboth new activities and the acquiring of non-banking firms engaged in activities alreadypermissible. For example, the Board hasdenied applications to acquire mortgageguarantee insurance companies and firms un-derwriting and dealing in U.S. Governmentand certain municipal securities. Although allof these meet the criteria of being "closelyrelated to banking" (see below), the Boardapparently did not believe the time and cir-cumstances were "right" for BHC entry.

In addition, it is conceivable that the listof permissible activities is close to being ex-hausted. To be exempt from prohibition,nonbanking activities must meet a two-parttest. First, each activity must be "closelyrelated to banking or managing or controllingbanks." To qualify for exemption, one of thefollowing connections must be made:

1) that banks generally have in factprovided the proposed service;2) that banks generally provide ser-vices that are operationally or func-tionally so similar to the proposed ser-vices as to equip them particularly wellto provide the proposed services;3) that banks generally provide ser-vices that are so integrally related to theproposed services as to require theirprovision in a specialized form. 3

Second, the activity must be "a proper in-cident" to banking and must pass a "netpublic benefits" test, requiring that the possi-ble benefits to the public—greater con-venience, increased competition, or efficien-cy gains accruing from the acquisition—outweigh possible adverse effects—increasedconcentration, decreased competition, orunsound banking practices. Since many of theactivities clearly meeting both these criteriahave already been approved by the Board, the

Federal Reserve Bulletin, February, 1976, p. 149.

Federal Reserve Bank of Chicago 13

Status of bank holding companynonbanking activities under

Section 4(c)-(8)(as of March 11, 1977)

Activities approved by the Board

1. Dealer in bankers' acceptances 2

2. Mortgage banking'3. Finance companie 2

a. consumerh. salesc. commercial

4. Credit card issuance 2

5. Factoring company/6. Industrial banking7. Servicing loans'8. Trust company'9. Investment advising'

10. General economic information'11. Portfolio investment advice'12. Full payout leasing'

a. personal propertyb. real property

13. Community welfare investments'14. Bookkeeping & data processing services'15. Insurance agent or broker-credit

extensions'16. Underwriting credit life & credit accident &

health insurance17. Courier servi ce 218. Management consulting to nonaffiliate

banks'19. Issuance of travelers checks'20. Bullion broker'21. Land escrow services', 2

22. Issuing money orders and variabledenominated payment instruments 1,2,4

Activities denied by the Board

1, Equity funding (combined sale of mutualfunds & insurance)

2. Underwriting general life insurance3. Real estate brokerage'4. Land development5. Real estate syndication6. General management consulting7. Property management8. Nonfull-payout leasing'9. Commodity trading'

10. Issuance and sale of short-term debtobligations ("thrift notes") 1

11. Travel agency'- 2

12. Savings and loan associations'

Activities pending before the Board

1. Armored car services'2. Underwriting mortgage guarantee

insurance'3. Underwriting & dealing in U.S. Government

and certain municipal securities",'4. Underwriting the deductible part of

bankers' blanket bond insurance(withdrawn) 1

5. Management consulting to nonaffiliated,depository type, financial institutions 1,2

'Added to list since January 1, 1975.

'Activities permissible to national banks .

'These were found to be "closely related to banking but the proposed acquisitions were denied by thehoard of Governors as part of its ''go slow - policy.

To be decided on a case-by-case basis.

14 Economic Perspectives

number of future additions to the list of per-missible activities is likely to be small. InFebruary the Board determined that theownership of savings and loan associations byBHCs is not a permissable activity. Althoughconsidered "closely related to banking," inthe Board's view the potential adverse effectsof affiliation with banking outweigh thepotential benefits.

Lastly, the adverse economic conditionsduring the 1973-75 period caused seriousfinancial problems for some BHCs resulting inthe fall of BHC stock prices and contributingto the Board's "go slow" policy. Many BHCshave been reluctant to push for either new ac-tivities or new acquisitions, which has beenreflected by a considerable reduction in BHCapplications of both types being submitted tothe Board in recent years. However, aseconomic conditions improve, this trend islikely to be reversed [26].

The Board has been criticized by somefor being too permissive with respect to theactivities BHCs are allowed to perform, whileit has been criticized by others for beingtoo restrictive. Clearly, both criticisms cannotsimultaneously be correct, and they serve tohighlight certain problems faced by the Boardin ruling on proposed activities.

First, the words "closely related to bank-ing" in Section 4(c)(8) of the act are extremelyvague. Essentially, the interpretation was leftup to the Board, subject to judicial review. Tosome degree the Board may feel constrainedby what it believes the courts will accept.

Second, it appears that the Board, in mak-ing its determinations on activities, considersthose activities which are permissible fornational banks. With a few exceptions thepermissible activities for bank holding com-panies and national banks are nearly identical(see table). Thus the range of activities BHCsmay perform is not very different from that ofmany banks.

Two other facets of the controversy overthe nonbanking activities of BHCs should benoted. While the list of permissible activities isimpressive, BHC entry by acquisition hasbeen predominantly limited to three areas:consumer and commercial finance, mortgage

banking, and insurance (underwriting andbroker or agency) [26]. De novo entry has, byand large, been limited to these three plusleasing and advisory services. Intuitively,these activities seem to afford the greatestopportunity for the application of bankingexpertise.

Given the controversy surrounding theimportance and range of nonbanking ac-tivities, one would expect that these activitiesconstitute a relatively significant proportionof the BHC organization. Quite the contrary istrue, however. Currently, nonbanking sub-sidiaries account for less than 5 percent of thetotal consolidated assets of BHCs [8, 32] andabout 3 percent of the assets of the largest 50BHCs [33].

Risk, soundness, and BHCs

Perhaps the most important and con-troversial current issue regarding entry ofBHCs into nonbank activities has been the im-pact of such expansion and diversificationupon the integrity and soundness of affiliatebanks, the holding company, and the bankingsystem. Although BHCs entered nonbankingareas en masse following the 1970 amend-ments, entry into these activities has subsidedwhile the controversy has continued.

Proponents of BHC expansion argue thatthrough acquisition of nonbank subsidiaries,the overall level of risk for a given level ofreturn can be lowered, thereby strengtheningthe BHC and, consequently, the bankingsystem. Performance of nonbank activitiesallows a BHC to diversify both by activity andby geographic market area, especially sincenonbank activities may be performed acrossstate lines. Ever since the advent of mul-tiproduct and multimarket firms, the logic ofdiversification has been employed by firms innon regulated industries to stabilize theprofitability of the total organization by in-sulating it from seasonal or cyclical variationsaffecting the organization's componentdivisions.

Opponents of BHC expansion questionwhether entry into nonbank activities has ac-tually stabilized the banking industry by

Federal Reserve Bank of Chicago 15

reducing risk per dollar of investment. Theyalso raise issues regarding permissible types ofrisks for BHCs.

The spectrum of alternatives ranges frompermitting BHCs to engage in no activityriskier than traditional banking services toallowing BHCs to undertake activities con-sidered much riskier than the basic functionsof banking. The Board's position on BHC ac-tivities appears to be about midway betweenthese two extremes.

The assessment of risks differs amongdepositors, managers, owners, and regula-tors. The Board, however, must view theriskiness of nonbank activities within the con-text of safety for the entire banking system, aconstraint not imposed by the other groups.That is, the Board must consider the riskinessof each activity with respect to the bank af-filiate and ultimately upon the bankingsystem, whereas the other groups view thebank affiliate as one of several activities to beperformed by the enterprise.

Economists and financial analysts dis-agree over methods for quantifying risk, giv-ing rise to many views regarding the iden-tification and objective measurement ofvarious risks. Consequently, the relationshipbetween diversification and risk and theresultant impacts on the soundness of in-dividual BHCs and the entire banking systemis difficult to assess.

Risk is essentially the lack of perfectknowledge in making decisions. A relevantmeasure of BHC performance is the mean, oraverage, rate of return either on assets orequity capital. A frequently used, but not un-iversally accepted, statistical measure of risk isthe standard deviation (or variance) of therate of return, which shows the dispersion(variation) of the profit rate about its averagevalue.

Two principal views exist regarding therelationship of risk, diversification, and per-missible BHC activities. One view holds thatrisk, measured by the standard deviation orvariance of the rate of return alone, is a suf-ficient criterion for determining thedesirability of entering nonbank activities.Any activity having a greater variance in its

rate of return than banking is defined as beingriskier than banking, and some analysts ex-tend this to say these should not be permissi-ble activities. A second view holds thatvariance alone is not a sufficient criterion.Rather, the proper criterion in evaluating ac-tivities should be risk relative to the expected,or average, return, although some upper limitto the amount of risk appropriate for BHCs toassume is probably implicit.

In combining two activities, risk becomesa function not only of the individualvariances, but also of the degree of correla-tion between the profit rates of the activities.If the profit rate of two activities exhibitsnegative correlation, the variance of the com-bined profit rate, and thus the risk, will belower than each activity taken alone. If the ac-tivities are positively correlated, the advan-tages of diversification may still exist. Com-bining activities having positive correlationbetween the rates of return may possibly in-crease the total risk but reduce the riskrelative to the total level of production. Thereturn to the BHC, as with any investmentportfolio, is likely to be more stable the widerthe range of activities (industry securities)held. In general, firms in the same industry aremore likely to do poorly at the same time thanare firms in unrelated industries.

An interesting situation arises regardingthose activities that pass the "closely relatedto banking" test of Section 4(c)(8) of the act.The more closely related the nonbank activityis to banking, the more likely there will be apositive correlation between the profits ofthat activity and banking, and the smaller theadvantages arising from the diversificationprinciples. BHCs can, therefore, reduce theirrelative risk exposure most by expanding intothe nonbank areas most remote from banking(unless earnings variances are a great dealhigher than in banking). From 1956-70 onlyone activity—banking—was explicitly per-mitted bank holding companies by the act,and little exercise of the diversificationmotive was open to BHCs.

The justification for diversification is notsolely restricted to the expected reduction inthe variation of profits. Diversification also

16 Economic Perspectives

helps mitigate uncertainty; in particular, bylessening a BHC's dependence on one activi-ty, it reduces the potential losses if that activitywere to become obsolete or unnecessary.

Before we can make any assessment ofthe impact diversification has had upon thesoundness of the banking system, we mustknow the risk levels associated with each ofthe nonbanking activities BHCs are likely toenter, as well as the degree of correlationbetween their profits and profits in banking. 4

Because nonbanking activities are re-quired to be "closely related to banking," onemight expect the correlation between theprofits of banking and several of the non-banking activities to be positive since theywould be subject to common influences.While limited empirical evidence exists onthis issue, one study indicates that the profitsof several permissible nonbank activities arenegatively correlated with bank profits,suggesting that it is possible to significantlyreduce a BHC's level of overall risk by diver-sifying into these activities [14]. For example,the returns in insurance and real estate finan-cing tend to be high when returns in bankingare low. On the other hand, the profitabilityof other nonbank activities—such as businesscredit, consumer credit, and loan servicing—exhibits a positive correlation with bankprofits. The different leasing functions havemixed correlations. These correlations arebased upon the profits of each industry andare predicated on the activities being per-formed independently. Once banking iscombined with another activity under thesame corporate umbrella, these correlationsmay no longer hold.

With respect to measuring the degree ofrisk in various activities, the evidence issomewhat contradictory. One study, measur-ing risk by the coefficient of variation of in-dustry profit rates (the standard deviation ofthe profit rate divided by the average profit

4 Industrial firms practicing diversification have notenjoyed unequivocal success. Diversification per se maynot have been the cause of this lack of success, however,since too rapid growth and expansion, undercapitaliza-tion, and adverse economic conditions may also havecontributed to their lackluster performance.

rate), found banking to be one of the mostrisky activities that BHCs are allowed to per-form [14]. Another study, measuring risk bythe standard deviation in the monthly rate ofreturn on the common stock of firms invarious industries over the 1961-68 period,found banking to be the least risky of the ac-tivities considered [11]. While both studieshave shortcomings, the latter was character-ized by a very small sample size (e.g., only 19banks, two mortgage banking firms, one in-surance company). Moreover, the return(and standard deviation) was computed on amonthly basis, which would seem to bemeaningful only from the viewpoint of thesmall investor. The actual annual profits of thefirm—an item of major interest to managers,controlling owners, and regulators in assess-ing risk—were ignored in the study.

Thus, empirical evidence currently is notsufficient to judge which nonbanking ac-tivities, taken in isolation, are more risky thanbanking and which are less risky; nor is it ade-quate to identify those activities having thegreatest stabilizing effect on holding com-pany profits.

While the variation in and correlation ofprofits are important concerns in dealing withsoundness, they are not the only concerns.Another is the problem of capitalization, bothof the BHC and of the nonbank affiliate. Thequestion has been raised whether parentholding companies tend to be under-capitalized [5, 21, 34], and there is someevidence to indicate that they are [21]. Also,some evidence suggests that BHC nonbankaffiliates in consumer finance and mortgagebanking have lower equity capital-to-totalasset ratios than the respective industry stan-dards [35] (referred to as leverage, but this isonly one of several possible definitions inuse). Whether BHC nonbank subsidiaries inother activities are more highly leveragedthan their nonaffiliated competitors is notknown. Furthermore, the statistical method-ology is somewhat faulty in that no effort wasmade to measure each firm's leverage ratioprior to acquisition. It is conceivable that thepreacquisition leverage was also higher thanthe industry standards.

Federal Reserve Bank of Chicago 17

In the final analysis, however, a morepreferable method of evaluating thesoundness of the banking system might be tosimultaneously examine the mean andvariance of earnings and the capital structure[36]. While this approach seems intuitivelyappealing, most studies have focused on oneor the other.

Other factors play important roles indetermining the soundness of the bankingand financial sectors. For example, thesoundness of any business entity dependsupon the degree to which it is legally in-sulated from the other bank or nonbank com-panies with which it is affiliated. Soundnessalso depends upon the degree to which BHCsprovide their affiliates with financial andmanagerial resources, thereby strengtheningthe affiliates. By instituting more aggres-siveness and risk into the operating policies ofaffiliates or introducing intersubsidiary trans-actions having the eventual effect ofweakening the bank or other affiliates, BHCscould significantly weaken themselves andthe banking and financial sectors. These con-siderations are important, but at the presenttime we have little knowledge of their extentand impact.

In sum, it appears at this time that we are along way from having any definite knowledgeof the impact of the nonbank activities ofBHCs upon the soundness of the banking andfinancial sectors. The partial evidence whichis available provides tenuous answers at best.As a final thought, it should be noted thateven if entry into the nonbank activities wereto reduce the risk of failure for the BHC, theexternal social cost of failure will very likelyrise because as the organization becomeslarger, the absolute cost of failure both to theorganization and to the financial system alsobecomes greater [5]. Therefore, the net effectdepends on what happens to the "expectedcost" of failure, obtained by multiplying theincreased cost of failure by the reducedprobability of occurrence.

But, to the extent that nonbank expan-sion is a substitute, rather than a complement,to bank expansion, the overall size of BHCsneed not increase.

Concentration and competition

After the 1970 amendments were passed,BHCs moved rapidly into many of the per-missible nonbanking areas, creating concernabout the impact this expansion would haveupon the concentration of economic re-sources. , One of the primary factors theBoard is required to consider under Section4(c)(8) of the act is the prevention of "an un-due concentration of resources." Typically,concentration is discussed at three levels:aggregate or nationwide concentration,statewide concentration, and local or marketconcentration. Unfortunately, comment onthe effects of nonbanking activities uponstatewide concentration is not possible at thistime because no work has been done in thearea.

Aggregate concentration. Since BHCsparticipate in banking as well as nonbanking(but closely related to banking) activities, thephrase "concentration of resources" mustrefer to financial resources. Between 1966 and1973 the share of total financial assets held bythe largest 100 BHCs increased from 16 per-cent to 29 percent [33]. 6 While this increase issubstantial, it is questionable whether a 29percent share accounted for by the largest 100firms constitutes undue concentration by thestandards of most U.S. "industries." It shouldbe kept in mind, however, that BHC entry intothe nonbanking areas has not been uniformacross activities.

On the other hand, it does not appearthat BHC entry into nonbanking activities, perse, has been a major contributor to this in-crease in aggregate concentration. The Boardhas limited entry into these activities largely toeither de novo or foothold entry; as a result,nonbank assets account for less than 5 per-cent of consolidated holding company assetsfor all U.S. BHCs and only 3 percent for thelargest 50 BHCs. While the amount of assets

5 For a fuller conceptual discussion of concentrationand competition, see 191.

6Excluding foreign branch assets, however, thefigures are 15 percent and 24 percent, respectively. Thelargest relative increase has thus been in this category.

18 Economic Perspectives

held in nonbank activities has been growing,it does not explain the 13 percentage point in-crease in the share of financial assets held bythe 100 largest BHCs. Rather, this changeappears to be more likely a result of the in-creased use by large banks of nondepositsources of funds to finance asset growth.

Local (market) concentration. Marketconcentration is, by far, the most importantmeasure of concentration because it is mostclosely associated with the degree of com-petition in a local area [9]. While there is nodirect evidence on this issue with respect tononbank activities, it may be possible to getsome insight into the future by looking at theBoard's policies related to permissible formsof entry into nonbank activities.

The Board seems to be following a two-part policy regarding BHC entry into the non-banking areas. First, the acquisition of largefirms (i.e., firms having a large share of themarket) is discouraged [17]. Second, entryinto new markets by either de novo orfoothold means is encouraged. In particular,the Board has made de novo entry ad-ministratively much simpler than the acquisi-tion of a going concern. De novo entry hasbeen emphasized because it adds a new deci-sion maker to the market and increases thenumber of competing firms, thereby raisingthe likelihood that BHC entry will have aprocompetitive effect. De novo entry wouldprobably be less prevalent in the absence ofthe act and the Board's enforcement policies.

With regard to credit services it is possi-ble that BHC activity has improved the alloca-tion of financial resources. Being able to ex-pand geographically, especially interstate, hasallowed BHCs to compete over a wider area,and thereby offer credit in locations wherethe demand is greatest.

At the same time, however, the magni-tude of mortgage lending has apparently notbeen affected by BHC affiliation. Preliminaryevidence indicates affiliated mortgage banksgrow no faster than nonaffiliated mortgagebanks, while commercial banks neither in-crease nor decrease their mortgage lendingactivity upon affiliation with a mortgage bank[27].

Operating efficiency

Improved operating efficiency for non-bank firms is a commonly cited benefit of af-filiation with a bank holding company. That is,through affiliation, the nonbank firm canpotentially achieve some cost reductionsthrough the parent holding company's abilityto generate new business for the nonbank af-filiate, thus increasing the affiliate's level ofoutput. If the affiliate is operating on thedownward sloping portion of its average costcurve, this increase in ouput could then betranslated into lower unit cost. The publicwould benefit if and when this lower unit costis passed on in the form of lower charges.Even if they are not passed on, loweroperating costs would increase theprofitability of the bank holding company,thus enhancing the strength of the bankingand financial systems.

A second source of potential cost savingsarises from economies of affiliation, whichcould result if some of the functions previous-ly performed by the independent firm werecentralized at the BHC level or if the purchaseof some inputs was centralized. For example,since the parent company may have greateraccess to the capital market, it may be able toacquire capital funds for the affiliate at a lowerrate than an independent firm of equal sizecould obtain.

While these arguments have intuitiveappeal, at the present time there is noevidence to support them. No systematic ef-fort has been made to study empirically theimpact of BHC affiliation upon the operatingcosts of nonbanking firms. On the otherhand, studies examining the impact of affilia-tion upon banking firms indicate that af-filiated banks, for some reasons, have highercosts than independent banks [9]. While theexact causes of this phenomenon have notbeen determined, one possible reason is thataffiliate banks are subject to higher chargesfrom the nonbank subsidiaries or the parentholding company [9]. A definitive judgmentcannot be made at this time as to the impact ofaffiliation upon the operating efficiency of

Federal Reserve Bank of Chicago 19

firms engaged in nonbanking activities; morework needs to be done in this area.

Pricing and profitability

Pricing. In the eyes of the Board publicbenefits arise from BHC performance of non-bank activities when affiliates charge lowerprices for any given service than their nonaf-filiated competitors. Empirical evidence onthis issue is sparse and provides little insight.The only nonbanking activity about whichthere is any evidence is insurance un-derwriting. Regulation Y stipulates that BHCscannot underwrite credit life, accident, orhealth insurance unless the premiums char-ged are less than the ceiling rates establishedby the state. According to a recent studyanalyzing the results of this policy, ratescharged by BHC affiliates in 1974 resulted inapproximately a 13 percent savings inpremiums [28].

Profitability. Because of the lack of infor-mation concerning either the operating ef-ficiency or pricing of nonbank affiliates, theimpact of affiliation on the profitability ofnonbank companies cannot be predicted.However, a recent study covering 1973 and1974 indicates that the rates of return on in-vested capital in two of the more popularnonbank activities—mortgage banking andconsumer finance—are considerably lowerfor BHC affiliates than for each respective in-dustry as a whole [35]. There are at least three

reasons for this occurrence. First, because oftheir comparatively recent entry into theseactivities, BHC affiliates could be charginglower prices in an effort to attract customersfrom their longer-established competitors;second, affiliates could be incurring highercosts; or third, affiliates could be carryinghigher levels of invested capital than theaverage firm in the industry (which con-tradicts Talley's study). Some combination ofthe three is also possible. At the present time,however, which influences may predominateis not ascertainable. Additionally, because theprofitability of these firms prior to affiliation isnot known, their lower rates of return maynot be due to affiliation.

Summary

Nonbanking activities of BHCs are a hotlycontested issue which will become even moreheated in the future. To draw any definitiveconclusions, based on evidence available atthis time, about the efficacy of BHC entry intothe nonbanking areas and the resultant im-pact on the financial system would beoverstepping the bounds of credibility.Evidence to support any conclusions is lack-ing both in quantity and quality, and unfor-tunately, if historical experience is a guide,probably half a decade will pass before we arein a position to make a more definitivedeclaration.

Dale S. Drum

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27. Rhoades, S. A. "The Effect of Bank-Holding Com-pany Acquisitions of Mortgage Bankers onMortgage Lending Activity." Journal of Business,XXXXV III (July, 1975), 344-48.

28. Rosenblum, Harvey. "A Cost-Benefit Analysis of theBank Holding Company Act of 1956." Unpublishedpaper presented at the Western Economic Associa-tion Conference, San Francisco, California, June,1976.

29. Rosenblum, Harvey. "Bank Holding Companies: AnOverview." Business Conditions, Federal ReserveBank of Chicago, August 1973, 3-13.

30. Rosenblum, Harvey. "Bank Holding CompanyReview, 1973/74." Business Conditions, FederalReserve Bank of Chicago, Pt. I: February 1975, 3-10;Pt. II: April 1975, 13-15.

31. Salley, Charles D. "1970 Bank Holding CompanyAmendments: What is 'Closely Related toBanking?"' Monthly Review, Federal Reserve Bankof Atlanta, June 1971, 98-106.

32. Schotland, Roy A. "Bank Holding Companies andPublic Policy Today." In U.S. Congress. House.Committee on Banking, Currency and Housing.FINE, Financial Institutions and the Nation'sEconomy: Book I, pp. 233-83. Committee Print.94th Congress, 2d session, 1976.

33. Seelig, Steven A. "Aggregate Concentration andthe Bank Holding Company Movement." Un-published paper, Fordham University, 1976.

34. Silverberg, Stanley C. "Bank Holding Companies andCapital Adequacy." Journal of Bank Research, VI(Autumn, 1975), 202-7.

35. Talley, Samuel H. "Bank Holding Company Perfor-mance in Consumer Finance and Mortgage Bank-ing." Bank Administration, LII (July, 1976), 42-44.

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