from the St Louis Fed
— this post authored by Julie Stackhouse, Executive Vice President
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.
