Are Bank Holding Company Structures Still Beneficial?

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By Julie Stackhouse, Executive Vice President

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

Not so very long ago, at the height of the financial crisis, a fall 2008 headline asked, “Why is Everyone Becoming a Bank Holding Company?”¹ Not 10 years later, a few mid-sized banking organizations appear to be going the other way, having recently announced their intent to dissolve their holding companies.

Some observers have applauded this development and are questioning whether the bank holding company form of ownership—used by almost 90 percent of U.S. banks—still provides organizational benefits. While the costs of maintaining this structure have been highlighted by those proposing to abandon it, numerous benefits exist.

Bank Holding Company Basics

In the simplest sense, bank holding companies are corporate entities that own one or more banks. These corporations can engage directly or indirectly in activities that are closely related to banking—as defined by the Bank Holding Company Act—but not permitted for banks themselves. In years past, holding companies have also issued capital or capital-like instruments different from those permitted for banks, such as trust preferred securities (TruPS), with the proceeds then distributed to subsidiaries as capital.

Smaller holding companies have also enjoyed the flexibility of the Federal Reserve’s Small Bank Holding Company Policy Statement. Under this policy statement, covered holding companies are allowed to operate with higher levels of debt than would normally be permitted, and they are exempted from the Fed’s consolidated capital rules.

What Has Changed?

For many holding companies, a significant benefit of the holding company structure was eliminated with the Dodd-Frank Act: the ability to issue capital or capital-like instruments different from those permitted for the bank. In addition, the Dodd-Frank Act generally eliminated TruPS as a form of regulatory capital for organizations exceeding $15 billion in consolidated assets.

Benefits of Holding Company Structures

Even with the Dodd-Frank Act limitations, there are other practical benefits of the holding company structure that remain.

Stock Repurchases

Banks may be limited in their ability to make a market for their own stock. Stock repurchases are governed and constrained by state and national bank statutes and may require prior approval of any reductions in capital.

In contrast, 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.²

Flexibility

The holding company structure provides an organization with the flexibility to choose when to merge or integrate an acquired bank with an existing subsidiary bank. The alternative—a bank-to-bank merger—requires banks to be fully integrated on “day one” of the acquisition, which may increase integration risk and related costs.

Problem Assets

Holding companies can be used to purchase problem assets from the bank, consistent with the holding company’s “source of strength” responsibilities. Many holding companies used this very strategy to protect their banks during the financial crisis.

Asset Transfers

The holding company structure may permit the transfer of acquired assets or activities that are impermissible for the bank under state law to the holding company to ensure compliance with state laws.

Permissible Activities

Some holding companies continue to benefit from engaging in activities or investments that are not permissible at the bank level, including securities underwriting activities, insurance underwriting activities and merchant banking.

Moreover, holding companies may invest up to 5 percent in any class of voting securities of any entity, without prior regulatory approval.

Small Holding Company Advantage

As noted previously, small holding companies operating under the Fed’s Small Bank Holding Company Policy Statement are generally permitted to use debt to raise capital for their depository subsidiaries or to make a market in their own stock.

Regulatory Simplification Vs. Long-Term Benefits

Some argue that regulatory simplification is an added benefit of dissolving a holding company when the bank is not a Fed state member. Advocates of this approach cite fewer regulatory filings and examinations.

For most banking organizations under $50 billion in assets, these regulatory costs are marginal. The Fed has long relied on the work of the insured depository institution’s primary regulator.³ It scales its supervisory approach depending on the organization’s complexity, risk, condition of the consolidated organization and timeliness of information available from the insured depository institution’s regulator.⁴

It should also be recognized that regulatory simplification in the short-run could have long-run consequences. Attempting to expeditiously form a new holding company when it is needed could be challenging if financial conditions are stressed or if statutory or other factors arise during the applications process.

So what’s the answer? The best option for many banking organizations may be to stick with the structure that provides the most flexibility to handle challenges and opportunities that come their way over time. That structure is a bank holding company.

Notes and References

¹ Jones, Kristin. “Why is Everyone Becoming a Bank Holding Company? It’s All About the Benjamins.” ProPublica, Nov. 12, 2008.

² Under current policy, a “well-capitalized” small institution is one with a pro forma debt-to-equity ratio of 1:1 or less.

³ “SR 16-4: Relying on the Work of the Regulators of the Subsidiary Insured Depository Institution(s) of Bank Holding Companies and Savings and Loan Holding Companies with Total Consolidated Assets of Less than $50 Billion.” Federal Reserve Board of Governors, March 3, 2016.

⁴ As set out by example in SR 16-4, a holding company with the following characteristics is a candidate for closer Fed supervision to ensure the conclusions reached by the insured depository institution regulators remain a valid basis for assigning the supervisory ratings to the consolidated holding company:

• The insured depository institution examination reports are not current.
• The composite rating for the holding company or any of its insured depository institution subsidiaries is less than satisfactory.
• The holding company has deteriorating financial or risk trends that are not reflected in the most current insured depository institution regulators' examination reports.

Follow the Series

• Why Are Banks Regulated?
• Did the Dodd-Frank Act Make the Financial System Safer?
• Bank Supervision and the Central Bank: An Integrated Mission
• Why Are There So Many Bank Regulators?
• Why Didn’t Bank Regulators Prevent the Financial Crisis?
• Who Funds the Cost of Bank Supervision?
• Why Does the Fed Supervise Small Banks?
• Regulation and Regulatory Burden
• Why America’s Dual Banking System Matters
• Fintech Interest in Industrial Loan Company Charters: Spurring the Growth of a New Shadow Banking System?
• Consumer Protection Laws and Regulations: Cost and Benefit Trade-offs

Additional Resources

• Community Banking Research and Policy Conference
• Federal Reserve: Relying on the Work of the Regulators of the Subsidiary Insured Depository Institution(s) of Bank Holding Companies and Savings and Loan Holding Companies with Total Consolidated Assets of Less than $50 Billion