Congressional efforts to improve regulation by creating a more vigorous regulatory oversight system have resulted in the easing of certain existing restrictions on the activities of banks while at the same time creating new restrictions with which banks will need to comply.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, state and national banks gain expanded authority to establish de novo interstate branches and the authority to pay interest on business demand deposit accounts. However, new restrictions on certain entities owning or controlling industrial banks, credit card banks, and trust banks have been established, as well as new limitations on the relationships that banks may have with hedge funds and private equity funds.

Moratorium on Approval of Deposit Insurance Applications Relating to Industrial Banks, Credit Card Banks, and Trust Banks

A three-year moratorium is established by the Act during which time the FDIC is prohibited from approving deposit insurance for applications that are received after November 23, 2009, for any industrial bank, credit card bank or trust bank owned or controlled by a "commercial firm." A company is considered a "commercial firm" if the annual gross revenues derived by the company and its affiliates from activities that are "financial in nature," and from the ownership or control of any insured depository institutions, represent less than 15 percent of the consolidated annual gross revenues of the company.

Moratorium on Approval of Change in Control Applications relating to Industrial Banks, Credit Card Banks and Trust Banks

A three-year moratorium has been established during which time federal banking agencies must disapprove any change in control applications relating to an industrial bank, credit card bank or trust bank, if the change in control would result in the control of such banking entity by a commercial firm. Federal banking agencies may approve such change in control in limited circumstances where the industrial bank, credit card bank, or trust bank is in danger of default; the change in control results from the merger or whole acquisition of a commercial firm, which controls an industrial bank, credit card bank, or trust bank, by another commercial firm; or the change in control results from an acquisition of the voting shares of a publicly traded company that controls an industrial bank, credit card bank or trust bank if, after the acquisition, the acquiring shareholder holds less than 25 percent of any voting class of the voting shares of the company and all other regulatory approval is obtained.

De Novo Branching Into States

The Act removes existing limits on de novo interstate branching which had required states to opt-in to interstate branching. For national banks, de novo interstate branches may be established if, under the laws of the state where the branch is to be located, the law of that state would permit establishment of the branch if the national bank were a state bank charted by such state. For state banks, de novo interstate branches may be established if, under the laws of the state where the branch is to be located, the law of that state would permit establishment of the branch if the state bank were a state bank charted by such state.

Interest-Bearing Business Checking Accounts

Banks were previously prohibited from paying interest on business demand deposit accounts under the Federal Reserve Act, the Home Owners' Loan Act, and the Federal Deposit Insurance Act. The Act eliminates this prohibition by amending each of the respective acts. However, banks are not permitted to pay interest on business demand deposit accounts for one more year, as these amendments do not take effect until one year after the date of the Act.

The "Volcker Rule"—New Limitations on Banking Entities' Proprietary Trading and Relationships with Hedge Funds and Private Equity Funds

The Volcker Rule places significant limits on the ability of a "banking entity" to engage in either proprietary trading or sponsoring and investing in hedge funds or private equity funds. "Banking entity" includes insured depository institutions, any company controlling an insured depository institution, companies treated as bank holding companies, and subsidiaries of such entities. Numerous exemptions and limits exist, many of which will be subject to rulemaking. Due to the complexity of the general rule and its exemptions, along with required studies and new rules, the full scope and impact of the Volcker Rule will not be known for some time. The Volcker Rule prohibitions will not be effective prior to the earlier of two years after enactment or 12 months after the issuance of final rules.

Securitization Restrictions

With some exceptions, the Act prohibits underwriters, placement agents, initial purchasers, and sponsors (or any affiliate or subsidiary of such entity) of an asset-backed security from engaging in transactions that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity. The SEC must issue rules to implement the restrictions within 270 days after enactment.