April 16, 2018
The Federal Reserve is the consolidated supervisor for all bank, financial, and savings and loan holding companies (referenced as “bank holding companies” in this article). For decades, the majority of banks in the U.S. have operated under the auspices of the bank holding company structure because of the advantages they have found in the organizational structure.
Bank holding companies allow for a wider range of permissible activities than a bank. Specifically, bank holding companies can invest in up to 5 percent in any class of voting securities of an entity without prior regulatory approval. Moreover, bank holding companies that elect to become financial holding companies are permitted to engage in additional activities, including unlimited broker-dealer operations, unlimited insurance underwriting and merchant banking. This broad range of permissible activities provides an organization the opportunity to diversify risk and income while supporting growth and innovation.
When engaging in acquisition and other expansionary activities, the bank holding company structure provides flexibility for choosing when to merge or integrate an acquired bank with an existing subsidiary bank (or whether to merge them at all). Bank holding companies avoid the requirement for a rapid integration at the time of purchase and thus have more flexibility and time when conducting complex system conversions, which can reduce integration risk and related costs.
The Fed’s Regulation Y permits stock redemptions of up to 10 percent of the holding company’s consolidated net worth in the preceding 12 months without prior approval, with additional flexibility for small, well-capitalized and well-managed holding companies. In comparison, banks are generally limited in their ability to make a market for their own stock. Stock repurchases are governed, and may be constrained, by state and national bank statutes.
Consistent with its “source of strength” responsibilities, a bank holding company can purchase problem assets from its bank subsidiaries. For example, during the financial crisis, many bank holding companies purchased substandard assets from their bank subsidiaries. This allowed the subsidiaries to maintain their problem asset ratios within acceptable levels.
Bank holding company structures may permit the transfer of acquired assets (or activities) that are impermissible for a bank under state law to maintain compliance with applicable state laws.
When executed in a well-planned and strategic manner, bank holding companies can issue debt that can be downstreamed to the bank to bolster the depository’s capital position or facilitate strategic acquisitions.
Interest payments on debt issued at a bank holding company, with the proceeds contributed to a subsidiary bank as equity capital, can be a bank holding company deductible expense. In some instances, this reduces the organization’s overall consolidated tax liability.
Smaller bank holding companies (those with $1 billion or less in consolidated assets that meet qualitative factors) have additional flexibility provided via the Fed’s Small Bank Holding Company Policy Statement. Given the importance of community banking to the financial system, the statement allows small bank holding companies to operate with higher levels of debt than would normally be permitted at larger holding companies or banks. Such debt can be used for acquisitions or stock repurchases, or it can be contributed to the bank subsidiary as capital to support growth.
The Fed values its connection to holding companies through the supervisory process. Given its broad authorities for monetary policy, financial stability, payments systems and operation of the discount window, a direct connection to—and ongoing dialogue with—bank holding companies is beneficial and instrumental to informing the best national policy decisions. In turn, it is hoped that bank holding companies find the Fed’s bank holding company supervisory knowledge and supervisory processes not only valuable, but also increasingly more efficient.