Congress thought the banking law it passed last summer would forever plug the nonbank bank loophole, but a New Jersey company has discovered that the new law may inadvertently allow 30 more of the limited-service financial institutions.
The Office of the Comptroller of the Currency, the federal agency that charters national banks, said yesterday that the bank law may enable federal regulators to permit Midlantic Corp. to convert a trust company in Florida to a bank with a full line of products for consumers, a so-called nonbank bank.
Midlantic's success in Florida might pave the way for 29 other bank holding companies to expand trust companies they own into banks that offer a full line of consumer services, officials in the comptroller's office said.
The companies include Chemical, Bank of Boston, Chase, J.P. Morgan, Bank of New York and Continental Illinois.
A majority of the 29 trust companies are in Florida and were established so that banks in the north and northeast could follow their clients when they retired to a sunnier climate.
A trust company is a financial institution that provides nothing but trust services, such as carrying out wills or executing trades for customers who set up a trust.
They do not make loans and may take deposits only for their employees or for persons for whom they are trustee.
A nonbank bank -- often called a limited-service bank -- offers commercial loans or checking accounts, but not both.
It thus bypasses a federal law that would require supervision by the Federal Reserve Board, the federal agency that regulates companies that own regular or full-service banks.
The loophole that Midlantic will use is very technical and complicated, the comptroller's office said, and whether its use can be blocked by state law remains to be seen.
Florida law does not allow companies from states outside the southeast to operate full-service banks within its borders.
That's why the northern bank companies opened trust companies rather than full service banks in the state in the first place, the regulators said.