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.
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.
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.
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.
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.
This article has been a guide to What is Bank Holding Company. We explain its regulations, an example, and compare it with a financial holding company. You can also go through our recommended articles on corporate finance -
