What Is A Bank Holding Company?

A bank holding company is a firm that has a controlling stake in one or many banks but doesn’t
directly engage in the offering of banking services. The banks owned by holding corporations
are not managed on a day-to-day basis, but they have power over management and the
organization’s policies.

does NOT offer

Bank Holding controlling
Has a BUt banking
company Stakes in banks
services
The adaptability of the bank holding company’s organizational structure makes it possible to
strengthen the capital position of the subsidiary bank. Additionally, it is advantageous as it
permits more economic diversity than is possible when utilizing a bank.
Bank Holding Company Explained
A bank holding company is any firm that satisfies even one of the two features: owns,
administers, or has the authority to vote on at least 25 percent of a certain class of banking
securities. In addition, maintains some degree of influence on the selection of the majority of a
bank’s governors or administrators in any capacity.
For a firm to qualify as a holding company, it is necessary to first receive approval from the
Federal Reserve Board and then fulfill all of the prerequisites and conditions outlined in the
Bank Holding Company Act and Regulation Y.
Forbidden activities for holding companies are trading and constraining holdings in hedge funds,
venture capital, and related vehicles. However, for it to keep its business running, it may buy
toxic assets, like investments that are difficult to sell, from a subsidiary bank. A holding
company also issues debt. Subsidiary companies receive their proceeds for expansion.
When a parent issues debt and then contributes the proceeds to a subordinate bank as capital
reserves, interest charges may be a cost that is tax deductible. As a result, the holding company
can have a lower tax burden.
Regulations

 Federal Reserve Regulation Y governs bank holding companies and state-member bank
procedures. In addition, regulation Y governs holding companies’ minimum capital reserves,
certain transactions, and the definition of nonbanking operations for bank holding companies
operating in the U.S.
 The existence of “nonbank banks” operated by various financial firms allows them to completely
avoid the act’s regional, operation, and capital adequacy constraints. Money market funds made
price controls outdated and eventually repealed them.
 The Douglas Amendment to the Act bars holding corporations from growing beyond state
boundaries unless state legislation allows it.
 The Bank Holding Company Act requires clearance from the Governors of the Federal Reserve
System for bank acquisitions. In addition, the Board must evaluate the holding firms’ capital
sufficiency.
Example
Let us consider an example to understand the concept better.
An article by Goldman Sach describes how they became a bank holding company. Goldman
Sachs is a global investment bank and financial services firm based in the United States. It
started in 1869, and its headquarters may be in Lower Manhattan. Goldman Sachs and Morgan
Stanley, the final two big investment banks in the United States, said on September 21, 2008,
that they would enter into regular bank holding companies.
This action reacted to the significantly altered scenario in marketplaces and the investment
banking business driven by Lehman Brothers’ failure and the subsequent global financial crisis.
As a holding company, Goldman Sachs will be eligible to use the discount window at the Federal
Reserve, which is a secondary source of funding maintained by the Fed for financial firms that
retain deposits. Having the status of a holding company would result in modifications
to accounting rule standards and direct supervision from the Federal Reserve.
Bank Holding Company vs Financial Holding Company

 A bank holding company can issue loans, purchase hazardous assets, generate capital for
subsidiary banks, minimize risk exposure, and qualify for tax benefits. In addition to what a
holding company may do, financial holding companies can underwrite insurance policies,
offer commercial banking services, and underwrite securities.
 A bank holding company can participate in nonbanking activities closely connected to banking.
A financial holding company can conduct financial transactions
 A bank holding company has to declare itself as a Financial holding company to get that status,
whereas a financial holding company is already a bank holding company.
Frequently Asked Questions (FAQs)
What is the purpose of a bank holding company?
The banks owned by holding corporations are not managed daily by those holding companies.
But on the other hand, they have power over management and the organization’s policies.
Is a bank holding company a financial institution?
A type of financial organization that focuses largely on providing residential mortgage loans and
receives deposits from individual customers as its primary source of financing. A firm that
influences another savings association holding company or the other saving and lending holding
company, either directly or indirectly. Any firm, also a holding company, is not eligible for this
incentive.
What is a non bank holding company?
Nonbank subsidiaries are businesses owned by bank holding firms that provide nonbank
products and services, such as insurance and investment advice. Still, they do not offer banking
products that the Federal Deposit Insurance Corporation insures, such as checking and savings
accounts. Some examples of nonbank services and goods include healthcare and financial advice.

 A bank holding company is a business organization with a controlling stake in one or more
financial institutions, such as banks.
 A holding company for one bank is referred to as a one-bank holding company. This holding
company has been around for a shorter period and provides a more flexible structure for an
independent bank.
 The ownership structure of a bank holding company accounts for ninety percent of all United
States banks.
 Because it’s a distinct legal entity from the banks it owns, it has greater autonomy in determining
how its operations are carried out.

Ref: https://www.wallstreetmojo.com/bank-holding-company/