A bank holding company is a corporate entity that maintains a controlling interest in one or more banks without directly offering banking services. Although they don’t participate in the daily operations, these companies exert control over management, formulate strategies, and monitor performance.
Authority and Control
Bank holding companies wield significant influence over their subsidiaries. They have the power to hire and fire managers, set and evaluate strategies, and oversee overall business performance.
Prominent examples include institutions such as Bank of America, Citigroup, and JPMorgan Chase & Co., all of which operate under holding companies.
Bank holding companies are regulated by the Federal Reserve. By contrast, banks independent of holding companies primarily fall under the jurisdiction of the Office of the Comptroller of the Currency, among other federal agencies involved in banking regulation.
Beyond Banking: Universal Holding Companies
Holding companies are not exclusive to banking. They’re frequently established to own the assets of multiple subsidiaries without directly producing any products or services.
Key Takeaways
- Focus: A bank holding company holds a controlling stake in one or more banks.
- Flexibility: One-bank holding companies specifically manage a single bank, offering more flexible operational scope.
- Diversity: Holding companies are common across various sectors. Berkshire Hathaway serves as a prime example.
These entities may hold assets including LLCs, real estate, patents, stocks, bonds, and more. Legal frameworks provide them partial protection against financial losses and the ability to distribute risks, liabilities, and taxes among subsidiaries.
A well-known example is Berkshire Hathaway, owned by Warren Buffet. This holding company manages substantial business stakes in companies like Coca-Cola, GEICO, Dairy Queen, BNSF Railway, and more, along with investments in Kraft Heinz and American Express.
The Unique One-Bank Holding Company
The one-bank holding company owns at least 25% of the voting stock of a commercial bank and operates under distinct circumstances.
Created in the late 1960s, these companies enabled independent banks to operate with the range typically afforded to larger holding companies. They expanded from individual depositor dependence into various activities like loans and commercial paper issuance.
Commercial Paper and Financial Flexibility
Issuing commercial paper was a key priority for one-bank holding companies. This short-term debt mechanism enables corporations to raise funds expediently for immediate liabilities and to finance accounts receivable and inventories. Usually maturing within 270 days, commercial paper is issued at a discount rather than paying traditional interest.
Related Terms: Holding Company, Commercial Paper, Federal Reserve, Subsidiary.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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Here are 10 quiz questions based on the term "Bank Holding Company" from Investopedia:
## What is a Bank Holding Company (BHC)?
- [ ] A company that primarily invests in real estate
- [ ] A financial corporation that holds precious metals
- [x] A company that controls one or more banks
- [ ] An insurance firm that provides financial planning services
## Which Act governs the activities of Bank Holding Companies in the United States?
- [ ] The Federal Reserve Act
- [x] The Bank Holding Company Act of 1956
- [ ] The Dodd-Frank Act
- [ ] The Investment Company Act of 1940
## What is one primary purpose of creating a Bank Holding Company?
- [ ] To reduce employment within the banking sector
- [ ] To consolidate unrelated businesses under a single name
- [x] To facilitate the raising of capital and improve regulatory flexibility
- [ ] To exclusively engage in cryptocurrency trading
## Which federal body primarily supervises Bank Holding Companies?
- [ ] The FDIC (Federal Deposit Insurance Corporation)
- [x] The Federal Reserve System
- [ ] The SEC (Securities and Exchange Commission)
- [ ] The OCC (Office of the Comptroller of the Currency)
## How many banks must a Bank Holding Company own?
- [ ] None
- [x] At least one
- [ ] At least two
- [ ] Three or more banks
## What kind of business activities can Bank Holding Companies engage in outside of banking?
- [ ] They can only engage in traditional banking activities
- [x] They can engage in any commerce-related activities
- [x] They may engage in permissible non-banking activities
- [ ] They can participate in any business activity with no restrictions
## How does a Financial Holding Company differ from a Bank Holding Company?
- [x] A Financial Holding Company can engage in a broader range of financial activities
- [ ] A Financial Holding Company is only allowed to hold non-financial businesses
- [ ]
A Financial Holding Company is limited by state laws
- [ ] There is no difference between the two
## Under which circumstance can a company become a Financial Holding Company?
- [ ] Automatically after being a Bank Holding Company for 10 years
- [ ] Only if it ceases banking activities
- [x] After meeting additional regulatory criteria and filing an application
- [ ] After expansion into international markets
## What is a primary advantage for a bank operating under a Bank Holding Company structure?
- [ ] It allows banks to avoid all federal regulations
- [x] It provides better access to financial markets and capital
- [ ] It eliminates the need for state charters
- [ ] It restricts involvement in non-financial activities
## Can a Bank Holding Company own non-banking subsidiaries?
- [x] Yes, but they are subject to certain regulatory restrictions
- [ ] No, they are strictly limited to owning banks
- [ ] Only if the subsidiaries are located internationally
- [ ] Only if the subsidiaries are engaged in philanthropic activities
