ABSTRACT

A bank, like other businesses, may find a number of reasons for and a number of methods of diversification. Many commercial banks, originally only concerned with short-term lending, were able to move into the provision of medium and long-term funds as their first form of diversification. A strong reason for diversifying its interests away from pure banking activities does appear to derive from the impact of regulation, because this option allows the bank to reduce the effects of regulatory constraints on its total business without having to reap a subsequent harvest of heavy restrictions. One limitation of importance here is that a bank’s operations may be constrained by the terms of its charter or licence; for example, in the United States multistate branching by bank holding companies is restricted by the Bank Holding Company Act of 1970 and activities allowed by bank holding companies in the same Act are those ‘closely related to banking or managing or controlling banks’. These limitations may be more apparent than real, for as Nadler 1 describes, bank holding companies have been allowed to make mortgage, finance or factoring loans; act as investment advisers for mortgage and real estate trusts; lease personal property directly or as an agent or broker; provide the services of an insurance agent or broker (so long as they are provided at the holding company’s offices); perform trust company functions; provide courier services; provide credit life insurance and credit accident and health insurance which is related directly to the bank holding company’s credit extensions; act as management consultants to certain non-affiliated banks; and invest in the equity or debt of corporations or projects primarily devoted to the provision of community welfare.