Bank Holding Company Definition

Technical Definition

• Under U.S. finance law, a bank holding company must own, control or have the power to vote 25 percent or more of a class of securities of a U.S. bank. Individual laws in each country dictate the activities of foreign holdings, so companies with international ownership must adhere to these laws respectively.
  
  

Function

• The primary function of a bank holding company is to manage the assets of banks under a single financial umbrella institution. This can be accomplished directly or indirectly, depending on the vision of the bank holding company and its board of directors.
  
  

Government Legislation

• The Bank Holding Company Act of 1956 was the first congressional act to regulate the dealings of bank holding companies. This act stipulated that the Federal Reserve must approve the establishment of bank holding companies in the U.S. It also prohibited bank holding companies from owning banks in multiple states in an effort to control monopolies. It also prohibited these intuitions from acquiring non-banking businesses.
  
  This act was repealed, however, in nearly 40 years later with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA). This law allows interstate mergers between managed banks. Further, the Gramm-Leach-Bliley Act of 1999 lifted the ban on bank holding companies owning non-banking corporations.
  
  

Federal Regulation

• The Federal Reserve Board of Governors is responsible for regulating the activities of bank holding companies, including acquisitions, operations oversight and merger approvals.
  
  

Advantages

• There are several types of bank holding companies, including large conglomerates such as those previously listed, as well as smaller banks looking to take advantage of corporation status. The advantage of re-structuring a small chain of banks as a legal bank holding company is that the business can reap the benefits of tax breaks. The law allows bank holding companies to absorb shareholder debt tax-free, to borrow funds more easily and to acquire other banks with greater ease.
  
  

Disadvantages

• Bank holding companies are subject to greater federal intervention than individual banks, especially if there are more than 300 shareholders. At this point, these institutions must register with the Securities and Exchange Commission and pay the costs of operating under these additional guidelines.