A bank holding company (BHC) is a company that owns or controls one or more banks. Rather than the bank sitting at the top of the group, a parent company holds the bank's shares and, often, other financial subsidiaries. In the United States the term has a precise legal meaning under the Bank Holding Company Act of 1956, and almost all large and many small US banks are owned this way.
The structure is a specific kind of holding company. In the US, the Federal Reserve Board supervises BHCs at the group level, while the bank subsidiaries are also supervised by their own chartering or insuring regulator, such as the OCC or the FDIC. Other countries use similar parent structures, but the US rules on what a BHC may own and do are the most detailed and widely discussed.
Bank holding company in plain terms
Picture a family business that owns a shop. Instead of the shop owning everything directly, the family sets up a parent company that owns the shop, a delivery firm and a small finance arm. The parent can borrow, raise money from investors and buy other businesses, while the shop carries on serving customers.
A bank holding company is that parent, with a bank as the main business underneath it. Because a bank holds people's deposits, the authorities keep a close eye on the parent too, so that problems elsewhere in the group do not spill into the bank, and so that the parent stands ready to support the bank if it gets into trouble.
Legal definition and supervision in the United States
Under the Bank Holding Company Act, a company is a BHC if it controls a bank, which generally means owning or controlling 25 per cent or more of any class of voting shares, controlling the election of a majority of directors, or exercising a controlling influence as determined by the Federal Reserve. Becoming a BHC, or acquiring another bank, requires Federal Reserve approval. The Fed's Regulation Y sets out the detailed rules.
BHCs must meet consolidated capital requirements, file regular reports and submit to examination. The largest are subject to annual stress tests, enhanced prudential standards and, for the biggest, resolution planning, described under banking resolution planning. The Dodd-Frank Act of 2010 put into statute the long-standing "source of strength" doctrine, which requires a holding company to serve as a source of financial strength for its bank subsidiaries.
Permitted activities
- Banking and closely related activities. A BHC may own banks and engage in activities the Fed has found closely related to banking, such as consumer lending, loan servicing and trust services.
- Financial holding companies. Since the Gramm-Leach-Bliley Act of 1999, a BHC that meets capital and management standards can elect to become a financial holding company, allowing securities underwriting and dealing, insurance and merchant banking.
- Separation of banking and commerce. BHCs are generally barred from owning ordinary commercial businesses, a principle that keeps retailers and manufacturers from controlling banks and has made exceptions, such as industrial loan company charters, controversial.
Why groups use a holding company structure
A holding company can raise capital and issue debt more flexibly than a bank, buy back shares, acquire other banks and nonbank firms, and house activities that a bank may not conduct directly. It also separates the insured bank from riskier affiliates, at least on paper, and transactions between a bank and its affiliates are limited by the Federal Reserve Act. In resolution, a holding company structure allows a "single point of entry" approach, in which authorities resolve the parent while keeping operating subsidiaries open, with losses absorbed by the parent's shareholders and creditors. Smaller banks sometimes form a holding company mainly to make it easier to raise funds, including through debt financing at the parent level.
Holding companies outside the United States
In the European Union, parent financial holding companies of banking groups must be approved by supervisors under the Capital Requirements Directive, and capital rules apply on a consolidated basis. In the United Kingdom, the largest groups must separate core retail banking into a ring-fenced bank within the group, a regime in force since 2019. Foreign banking groups with large US operations must place many of their US subsidiaries under a US intermediate holding company. Banks may also hold specialised entities through an operating subsidiary instead of the parent.
Criticism
Critics argue that complex holding company groups are hard to supervise and to resolve, and that the safety net provided to insured banks, including deposit insurance and access to central bank lending, may implicitly extend to affiliates. The use of debt raised at the parent and pushed down as equity into the bank, sometimes called double leverage, can overstate how well capitalised the group really is. Others contend that the restrictions on commercial ownership limit competition and innovation, an argument raised by technology and retail firms seeking bank charters. Supervisors respond with consolidated capital requirements and limits on intra-group transactions.