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Grow Shareholder Value: For Banks 5+ Years

Bank Holding Companies and Financial Holding Companies


Most banks in the U.S. are owned by bank holding companies (BHCs). The Federal Reserve supervises all BHCs, whether the bank subsidiary is a state member, state nonmember, or national bank. This topic provides information concerning the legal framework and regulatory reporting requirements for BHCs. Please review Bank Holding Company for information concerning whether and when to form a BHC, as well as information on the application process.

Bank Ownership by BHCs

Currently, about 84 percent of commercial banks in the U.S. are part of a BHC structure. More than 75 percent of small banks with assets of less than $100 million are owned by BHCs; this percentage increases to 100 percent for large banks with more than $10 billion in assets. About 60 percent of minority-owned banks are owned by BHCs.

The following charts demonstrate the prevalence of BHC ownership of banks in the U.S.:

Legal and Policy Framework

Bank Holding Company Act of 1956

The Bank Holding Company Act (BHC Act) External Link establishes the terms and conditions under which a company can own a bank in the U.S. and authorizes the Federal Reserve to adopt regulations as necessary in order to administer, uphold, and enforce the BHC Act. Some of the key concepts and definitions in the BHC Act are outlined below.

Responsible Supervisory Agency

The Federal Reserve is assigned exclusive jurisdiction as the federal supervisory agency over BHCs.

Bank Investments

A company that proposes to acquire Control of a bank must apply to the Federal Reserve for prior approval to become a BHC. Investments by a BHC in additional banks exceeding 5 percent of the target bank's outstanding voting shares also require prior approval.

Applications are processed under established time frames and must meet certain competitive, financial, and managerial standards in order to be approved. All of these standards are outlined in the BHC Act.

Nonbanking Investments

A BHC may engage directly in—or establish or acquire subsidiaries that engage in—nonbanking activities determined by the Federal Reserve Board to be closely related to banking (e.g., mortgage banking, consumer and commercial finance and loan servicing, leasing, collection agency, asset management, trust company, real estate appraisal, financial and investment advisory activities, management consulting, employee benefits consulting, career counseling services, and certain insurance-related activities).

A BHC can also make investments in companies not engaged in activities closely related to banking, but these investments cannot exceed 5 percent of the target company's outstanding voting stock.

Filing requirements and procedures for nonbanking proposals, either post notice or prior approval, depending on the nature of the transaction, are outlined in the BHC Act. The act also includes the competitive, financial, and managerial standards for approval.

Regulation Y, Bank Holding Companies, and Change in Bank Control

Regulation Y External Link is the Federal Reserve's primary regulation that implements the BHC Act and governs BHCs.

Financial Holding Companies

Amendments to the BHC Act in 1999, i.e., The Gramm-Leach-Bliley Act, External Link allowed for a BHC to declare itself a financial holding company (FHC) and thereby engage in financial activities, including securities underwriting and dealing, insurance agency and underwriting activities, and merchant banking activities.

For a BHC to be eligible to declare itself an FHC, all of the BHC's depository institution subsidiaries must be well-capitalized and well-managed and have satisfactory or better ratings under the Community Reinvestment Act.

To clarify the confusion that sometimes exists regarding BHCs and FHCs, it is useful to think of an FHC as a hybrid form of BHC that has additional authority to make financial investments.

Policy Statement on Small Bank Holding Companies

In the 1980s, the Federal Reserve issued an important policy statement on small BHCs, which is Appendix C to Regulation Y. External Link The policy statement recognizes the importance of community banking in the financial system and affords certain advantages to facilitate ownership and transfer of small banks by BHCs. A 2006 revision of the policy statement increased the asset threshold for a small BHC from $150 million to $500 million.

Small BHCs are exempt from the consolidated BHC capital guidelines to which larger organizations are subject. The capital adequacy of small BHCs is based on the bank's capitalization, just as if the BHC were not present. This means that the BHC, within reasonable parameters determined by its ability to service and retire debt, can use lesser forms of capital or debt funding to provide, for example, equity capital to the bank or to help fund an acquisition. In addition, small BHCs also enjoy simplified reporting requirements.

Ongoing Supervision of BHCs

The BHC Act gives the Federal Reserve the authority to examine or inspect BHCs, much like bank regulators examine a bank. The Federal Reserve has developed a rating system for BHCs, referred to as RFI/C. External Link R stands for risk management, F for financial condition, and I for impact. In addition, a composite rating, C, is assigned. The RFI/C components are rated from 1 through 5.

However, small BHCs, those with consolidated assets of less than $1 billion, are supervised largely off-site and assigned only a composite rating. This composite rating is based on the CAMELS rating assigned to the subsidiary bank by its regulators. Supervision of a noncomplex BHC over a small bank is normally not burdensome.

Regulatory Reporting Requirements

Regulatory reporting is another area where small BHCs are less burdened compared to larger organizations. A simple report, the FR Y-10, Report of Changes in Organizational Structure, External Link must be filed to reflect significant changes in structure, ownership, or activities as they occur.

All of these significant changes are reported in an annual report, the FR Y-6, Annual Report of Bank Holding Companies. External Link In addition, a small BHC must file the FR Y-9SP, Parent Company Only Financial Statements for Small Bank Holding Companies External Link on a semi-annual basis.

The reports submitted to the Federal Reserve are useful for off-site supervision, and they are helpful in avoiding on-site exams of the BHC.