A holding company is a company that doesn’t own any assets—it owns other companies and thus acts as a conduit for the business it hosts. A bank operating under a holding company structure can benefit from the flexibility, diversification, and improved capital position that such a corporate entity allows.
Holding companies also provide greater compliance with changing regulatory standards and easier growth opportunities than their parent banks alone could.
The bank holding company structure is a highly effective tool used by companies to grow and diversify their holdings.
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Bank Holding Company: Definition and Explanation
When a company owns a bank and operates it under a different name, it is known as a bank holding company. A bank holding company is a corporate entity that helps banks improve their capital positions and compliance with government regulations.
BHCs have a number of advantages over banks. Companies that follow the BHC model can enjoy greater flexibility in their revenue streams, which helps to improve capital positions and provides access to a wider group of investors. In general, BHCs are more agile than banks and better able to expand their operations through acquisition. And for businesses seeking growth, the BHC approach makes it far easier to add or shed non-bank subsidiaries without worrying about regulatory compliance.
Acronym: BHC
A bank holding company (BHC) holds a minimum of 25% of United States banks, which are regulated by a body of boards of Governors of the Federal Reserve System (FRB). And these organizations are usually complex and large.
Bank holding companies are known to run several bank subsidiaries. Just like the four biggest bank holding, possessing over 2,000 subsidiaries. And you can easily identify them, especially based on their system of operation.
An example of a bank holding company is the J.P. Morgan Chase & Co company, which is also the world’s largest. It owns well over $3.6trillion in current assets. The companies has subsidiaries are such as Chase Manhattan Bank, Bear Steams, Washington Mutual, and Bank One.
How a Bank Holding Company Works
As earlier stated, holding companies exercise dominance over companies they own, and are usually said to be the parent companies of such companies under their care.
Holding companies have a sole essence which is to help their subsidiaries function properly. They do not create a product or manufacture anything they work around meeting regulatory requirements of companies to make them highly profitable.
Bank holding companies (BHCs) are corporate structures that are allowed to own several subsidiary companies, including banks. A BHC’s purpose is to move capital between related groups of businesses.
They are corporate structures that encompass the parent company and all of its banking subsidiaries. They’re typically created to own bank stock. The BHC structure gives banks flexibility to expand their business beyond basic banking services by managing investment portfolios and growing networking capabilities. It also allows them to easily enter new markets—for example, a community bank can amass multiple local banks as subsidiaries under one BHC holding.
BHC also moves assets around to make business goals attainable. It also has a structure that makes it less liable to risks which are not legally possible with a regular bank.
For instance, a bank holding company can acquire hard-to-sell investments which are also referred to as toxic assets from a subsidiary bank to be able to sustain running banking activities.
This procedure was common during the 2008 financial crisis that had mortgage organizations migrate from the regular banks to bank holding companies.
BHCs are however, not permitted to engage in certain activities, such as participating in proprietary trading, and reducing their hedge funds investments, related vehicles, and private equity.
Pros and Cons of a Bank Holding
Pros
-Tax advantages
-Liquidity and capital
-Activity diversification
-Approach to growth and acquisition is flexible
Cons
-Has a different regulator.
-High cost of regulation and operation.
–Increase reporting on finances.
Pros Explained
Tax Advantage:
Bank holding companies gains tax advantages in addition to the cost savings, namely a more efficient and cost-effective management team. When the parent bank holding company issues debt where the proceeds are contributed to the subsidiary bank as equity capital, interest payments can be a deductible expense. This, in turn, can reduce the tax liability of the holding company.
There are several advantages to becoming a bank holding company. Taking advantage of tax by issuing debt that is contributed to an affiliate bank as equity capital, means interest payments can become a deductible expense for the holding company.
Approach to growth and acquisition is flexible:
A BHC has a structure that supports growth. For instance, the company can use assets taken from a bank ito be used in their portfolios. This approach makes a holding company more effective in carrying out it’s required functions and also risk-free. It would also help them to function in line with provided regulations.
Liquidity and Capital
A BHC can boost the liquidity of the bank and it’s capital position. Moves they can make include acquiring problem assets from the bank and shareholder stock repurchases.
Activity Diversification
Bank holding companies (BHCs) are firms that own other companies’ outstanding stock. This means they are allowed to control management and policies so they can guide their acquisition to success. It is a way to diversify activities and manage an investment portfolio of financial services subsidiaries.
The Bank Holding Company Act of 1956 (BHCA) prohibited banks from owning other financial companies and required the divestiture of existing non-bank financial subsidiaries. However, in 1970, Congress passed the Bank Holding Company Act Amendments of 1970 (BHCAA), allowing well capitalized bank holding companies to acquire other financial companies.
Cons Explained
Has a different regulator.
BHCs regulations are often implemented by the Federal Reserve System (FRB).
High cost of regulation and operation.
The cost of filings, registration, and Governance required by the Security and Exchange Commission can run into some huge amounts.
Increase reporting on finances.
The reporting requirements, record keeping, and accounting aspects distinguishes the holding company from books for the bank.:
Bank Holding Company vs. Financial Holding Company
A bank holding company (BHC) is a company that owns more than one commercial bank, but operates each separately. BHCs are allowed in the United States under the Bank Holding Company Act of 1956. They’re regulated by the Federal Reserve Board as well as state regulators. In order for a BHC to declare itself a financial holding company, subsidiary banks must be well-capitalized and have satisfactory or better ratings under the Community Reinvestment Act.
A bank holding company (BHC) has control over one or more banks, but does not have the expanded powers of a financial holding company (FHC). A financial holding company has additional authority to make investments in non-banking concerns, to underwrite insurance and securities, and to conduct merchant banking activities. They must also receive satisfactory ratings under the Community Reinvestment Act.
A financial holding company can engage in a number of additional activities like underwriting insurance policies, offering merchant banking services, and dealing in and underwriting securities. There are many reasons that your business might choose one over the other.
There are many reasons that your business might choose one over the other. For instance, a financial holding company can underwrite insurance policies and deal in securities, among other things. To declare itself an FHC, subsidiary banks must be well-capitalized and have satisfactory or better ratings under the Community Reinvestment Act.
A BHC must be well-capitalized, have satisfactory or better ratings under the Community Reinvestment Act, and underwrite insurance policies, offer merchant banking services, and deal in and underwrite securities.
Conclusion
A bank holding company is a type of business entity that holds a bank or banks and can conduct many types of banking-related activities. The flexibility to conduct such investments through holding companies has given banks the ability to become global and more profitable.
As opposed to a bank holding company, financial holding companies don’t have to be located in the same place as their banks. This is good for the stability of a bank, so if there is a fluctuation in a particular part of the country, the economy can stay strong.
