How the Bank Holding Company Act helped shape modern banking consolidation

Back in the 1950s, Congress feared a future in which a small number of powerful banking organizations would dominate the financial sector. Policymakers worried that control over credit would determine which businesses survived, which communities received investment, and who could access economic opportunity.

However, that concern also emerged in a competitive and politically charged environment, where rival firms often pushed for regulatory and antitrust action that could serve competitive or rent-seeking aims. Disputes involving large banking organizations such as Transamerica helped build momentum for federal legislation. This dynamic is discussed by CEI Director of Finance Policy John Berlau in further detail.

To prevent what many lawmakers portrayed as a bleak future, Congress passed the Bank Holding Company Act (BHCA) 70 years ago last week. The Act expanded the Federal Reserve’s authority over bank holding companies, restricted interstate expansion, and reinforced the separation of banking and commerce.  

That separation reflected a long-standing policy approach that limited combinations of banking and commercial firms to reduce conflicts of interest and risks to safety and soundness. That framework developed over time through banking legislation culminating in the BHCA.

While many of its provisions have since been modified or repealed, the law’s broader framework still shapes debates over financial concentration, competition, and innovation. Its anniversary highlights how closely today’s banking system resembles the system Congress sought to prevent.

One of the most important effects of the BHCA was channeling banking growth into the bank holding company structure. The BHCA defines a bank holding company as any company that controls one or more banks. Control is understood as ownership of or influence over voting shares, management, or the board of directors. By defining and regulating this structure, the Act made holding companies the primary vehicle for expansion, acquisition, and geographic diversification.

The Federal Reserve Bank of Cleveland has described the 1950s and 1960s as a “quiet period” marked by market stability and declining competition that followed the BHCA. During this period, banks increasingly expanded across regions and entered new markets through parent holding companies. Much of that growth occurred through the acquisition of existing banks as subsidiaries under federal oversight.

Under the BHCA, acquisition of even a single new bank required Federal Reserve approval. Restrictions on interstate branching and broader commercial affiliations reinforced this approval-based framework to the point that acquisition-based growth became the dominant strategy for expansion in US banking. The 1985 Douglas Amendment further limited interstate bank acquisitions unless expressly authorized by state law, which tied expansion more directly to regulatory permission.

As Berlau has argued, when entry and expansion are channeled through regulatory approval instead of the open market competition that occurs in other economic sectors, large incumbent institutions are better positioned to grow and entrench themselves over time. The BHCA is a central example of this structure in banking, and it did not end there.

In 2010, the Dodd-Frank Act reinforced the BHCA paradigm in which large, consolidated banking organizations are managed through designation, supervision, and structural oversight. Expansion and merger decisions are therefore tied to regulatory review that emphasizes institutional structure and safety and soundness considerations, which can limit flexibility and innovation in financial services.

By contrast, other countries’ financial systems permit closer integration between banking and commercial firms. This allows nonbank companies to operate financial subsidiaries that can compete more directly with traditional banks.

The UK provides an example of non-financial firms directly operating financial institutions. Tesco ran its own banking subsidiary for more than a decade before being acquired by Barclays, which illustrates a system in which commercial firms can own banks outright in addition to partnering with them.

The boundary between banking and commerce established during this era continues to shape how fintech firms, embedded finance platforms, and other nonbank financial companies interact with traditional banks. In practice, many still access core financial functions through regulated banks via partnerships, charter arrangements, or other regulatory pathways.

Much of modern financial innovation is built on incumbent banking organizations. This reinforces the role of large banks as infrastructure providers and gatekeepers to core financial services. Over time, financial decision-making has become more centralized and less relationship-driven.

After the financial crisis, Dodd-Frank added compliance and regulatory burdens that smaller institutions were often less equipped to absorb, which contributed to another wave of consolidation through mergers and acquisitions. This strengthened the position of large banking organizations that already occupied central positions within the regulatory system.

If that boundary were to loosen, more core financial intermediation activities, including payments, lending, and deposit-taking functions, could occur outside traditional banking institutions. This would reduce incumbents’ control over distribution channels and weaken existing competitive advantages in large banking organizations.

In summation, the BHCA has contributed to a banking system dominated by large, centralized institutions that have replaced local banking relationships with standardized, scale-driven decision-making. It has also embedded a structure in which entry into core financial services, including much of today’s fintech innovation, depends on navigating a complex regulatory approval process.

As a result, large firms are better positioned to consolidate advantages while smaller firms face higher barriers to entry. These dynamics weaken competition in financial services. A framework that produces this outcome has outlived any justification for its continued existence.