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From Banking and Finance Law Daily, April 24, 2018

Atlanta Fed article stresses the advantages of a bank holding company framework

By Thomas G. Wolfe, J.D.

In her ViewPoint article for the Federal Reserve Bank of Atlanta’s April 19, 2018, issue of "Economy Matters: Banking & Finance," author Madeline Marsden underscores the advantages of a bank holding company (BHC) framework. Marsden’s article, titled "The Costs and Benefits of the Bank Holding Company Structure," outlines the advantages of the BHC framework, the Fed’s efforts to reduce the regulatory and supervisory burden for BHCs, and common misconceptions about BHC dissolutions.

Marsden is a senior financial policy analyst in the Atlanta Fed’s Supervision and Regulation Division.

BHC advantages. In the article, Marsden observes that 76 percent of all commercial banks headquartered in the Atlanta Fed’s Sixth District maintain a BHC structure. Whether a bank uses a BHC structure is "solely a business decision," the author emphasizes. According to Marsden, the BHC framework offers banks a number of options "to facilitate growth and diversify and manage risks in ways that a bank charter alone does not." Among other things, the article notes that BHCs:

  • can issue debt, the proceeds of which may improve a depository institution’s capital position;
  • are permitted to purchase problem assets from bank subsidiaries, which may serve to support those banks;
  • can purchase stock in other financial institutions, providing BHCs with additional options for managing company acquisitions;
  • have various tax advantages available to them, including certain deductible expenses;
  • may, under specified circumstances, engage in a range of activities, including investing, stock repurchasing, broker-dealer operations, insurance underwriting, and merchant banking;
  • can diversify risk—for example, by using captive insurance companies; and
  • may explore innovation—for example, by investing up to 5 percent in any class of voting securities without prior regulatory approval.

BHC regulation, supervision. The article indicates that the Fed has taken steps to reduce the regulatory and supervisory burden on BHCs. For instance, Marsden points out that smaller BHCs are relieved from certain consolidated capital requirements and reporting requirements imposed on larger BHCs. Also, to reduce duplicative supervisory efforts by regulators as well as reduce the burden on BHCs, the Fed relies heavily on the insured depository institution’s "primary regulator" and coordinates its supervisory planning schedule with other federal regulators. Further, Fed examiners seek to tailor their supervision and guidance by taking into account, where applicable, a financial institution’s "unique scope and complexity of activities."

BHC dissolutions. Asserting in her article that there are certain "misconceptions associated with BHC dissolutions," Marsden attempts to clear those up by explaining that:

  • there is not a governmental expectation that there be two sets of boards of directors for a holding company and its subsidiary bank—the respective boards may be identical;
  • although banks are generally exempt from Securities and Exchange Commission registration and reporting requirements, some of those requirements would shift from the SEC to the bank’s primary regulator if the BHC were to be dissolved; and
  • while the Fed is exploring ways to streamline the pertinent application process, there are in-built challenges associated with a new holding company being formed when financial stress, statutory considerations, or other conditions are present.

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