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What is Regulation Y?

Mary McMahon
By
Updated Feb 19, 2024
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Regulation Y is a regulation in the United States which pertains to the administration of bank holding companies. The Federal Reserve Board of Governors is responsible for enforcing Regulation Y. Regulation Y is designed to address many of the common aspects of doing business as a bank holding company. Like other financial regulations, it protects both consumers and the economy by establishing standards and oversight which are designed to prevent abusive financial activities.

A bank holding company is a company established for the purpose of owning one or more banks. Without regulation, such companies could be well positioned for questionable financial activities or simple mismanagement which could result in financial problems. Since bank holding companies may control several banks, when such companies get into trouble they can create a ripple effect which spreads to other banks and other areas of the economy. This is not desirable, and Regulation Y is intended in part to keep bank holding companies under regulatory control.

Regulation Y defines bank holding companies, explains how they must be formed, and sets out a number of procedural rules which are designed to limit and standardize their activities. For example, the regulation discusses certain nonbank activities which a bank holding company can engage in because they are similar in nature to banking and thus could be considered an extension of the type of work the company does. This regulation also sets out the kind of activities such companies can engage in and when, with an emphasis on oversight by regulators who can inspect their operations if there are concerns.

The regulation also establishes capital reserve requirements which are designed to prevent situations in which bank holding companies do not have adequate reserves and run into trouble as a result. Troubled bank holding companies are subject to some special rules under Regulation Y, including a rule requiring Federal Reserve authorization to replace their chief officers. This regulation also discusses what occurs when bank holding companies acquire shares in other institutions which will come with voting rights and thus would give the holding company a potential method of controlling another company.

Under Regulation Y, certain activities require approval from the Federal Reserve. For example, bank holding companies cannot merge without authorization. They also cannot acquire other bank holding companies or banks without approval. Such regulations are used to provide the Federal Reserve with oversight and the opportunity to intervene before a problematic situation arises.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By hamje32 — On Feb 26, 2012

@SkyWhisperer - I agree. Banks are flush with cash, and they have the ability to consolidate with other businesses or start offering additional services.

Every time that they do that, they increase their risk with each new venture. I am glad that we have regulation policy in place which can reign in these banks before they become reckless behemoths. This is, after all, our hard earned money we’re talking about.

By SkyWhisperer — On Feb 26, 2012

@allenJo - I think that Regulation Y has been around for a long time. Yes, there was a bailout during the Savings and Loan crisis. Whether Regulation Y played a role in that crisis I don’t know, but I can tell you that new regulation laws usually follow crises in the financial sector.

As a result I am more confident in our financial institutions now than ever before, especially after the collapse in the mortgage markets and the housing bubble burst and things like that.

These catastrophes have, I hope, made us stronger. We need more regulation, not less, in my opinion. I am normally in favor of free markets but when it comes to banking institutions, I think tighter regulation is better.

By allenJo — On Feb 25, 2012

So where was Regulation Y during the Savings and Loan crisis in the 1980s when hundreds of banks failed and billions of dollars were lost? I know there was a bailout but was this regulation around and what impact, if any, did it have?

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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