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Manage Transition: For Banks 0-5 Years

Bank Holding Companies


Most U.S. banks 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 section provides information to assist in deciding whether and when to form a BHC.

Bank Ownership by BHCs

Currently, about 80 percent of commercial banks in the U.S. are part of a BHC structure. Relatively few BHCs, however, are formed by banks while the bank itself is in the organizational phase. Typically, the formation of a BHC is made at some future point in the bank’s operations.

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

More than 73 percent of small banks with assets of less than $100 million are owned by BHCs, while this percentage increases to 95 percent for large banks with more than $10 billion in assets. About 60 percent of minority-owned banks are owned by BHCs.

Judging from the large number of BHCs, the question for most banks appears to be when to form a BHC, not whether. It should be noted, however, that some banks have been acquired by a BHC, as opposed to having made an active decision to form their own BHC.

Starting in 1980, only six out of 202 new banks opened with BHCs, or about 3 percent. But by 1985, this percentage had jumped to about 18 percent, with 56 out of 306 new banks forming BHCs. The percentage continued to increase slightly over the next decade, and since the mid-1990s, it seems to have stabilized near 25 percent. In 2007, for example, 40 out of 162 new banks opened under a BHC structure. No De Novo banks have been formed since 2007. View the accompanying chart for more detailed information. PDF

Should an Organization Form a BHC?

There is no easy answer to this question. Each organization is unique and should make its own determination.

The Federal Reserve is neutral on the question of whether banks should form BHCs, and it does not actively market or encourage the formation of BHCs. The BHC provides a structural alternative that may be appropriate given a bank’s circumstances, priorities, and business plan. The Federal Reserve will consider BHC applications if they meet the established financial and managerial standards.

The Fed has taken steps over the years to streamline the applications process and to reduce regulatory burden in supervision and reporting, particularly for small BHCs. To the extent possible, the Federal Reserve wants to take regulatory burden out of the equation, so organizations can base their decision strictly on business considerations.

Pros and Cons of BHC Formation


Increased access to capital markets is one of the primary advantages to the BHC structure. A BHC has the ability to raise capital in forms other than common stock, including considerable latitude in assuming or incurring debt. This might be done, for example, to fund a capital injection to the subsidiary bank or to pay for an acquisition. Debt is always limited, however, by the BHC’s demonstrated debt servicing and retirement capability. Also, substantial levels of debt in a de novo organization are discouraged.

Structural flexibility is another reason to form a BHC. It is sometimes desirable to conduct an activity outside the insured depository. This strategy can be driven to take advantage of special legal provisions available to BHCs, or to protect the bank against liability concerns such as the potential for environmental damage associated with foreclosed properties.

BHCs also offer increased flexibility in regard to merging with or acquiring additional banks. In addition to merging a bank into a BHC’s subsidiary bank, a BHC can acquire an additional bank and operate as a multibank BHC. In the case of multi-bank BHCs, these entities can be utilized to provide centralized services to its banks such as independent loan review or asset liability management. A BHC can also provide tax advantages through filing consolidated tax returns.

Finally, even if the organization has no immediate plans to use the BHC in any of the ways discussed above, forming a BHC can take time, so there is a school of thought that argues for establishing the BHC ahead of time to provide maximum flexibility going forward.


For a de novo organization, there are additional costs and more complexity in the start-up phase associated with the formation of a BHC. Also, there are ongoing costs related to Federal Reserve supervision and reporting requirements, despite the Federal Reserve’s efforts to minimize these burdens. Additionally, a BHC may be subject to additional cost and regulation if it is required or elects to register its securities with the Security and Exchange Commission. Another con is that a de novo BHC would likely need to increase the organization’s initial capital offering by at least several hundred thousand dollars in order to provide working capital for the BHC. (It is important to anticipate the BHC’s funding needs because a de novo bank will not be able to pay dividends for the first few years.)

Finally, forming a BHC will placed and increase burden on management who must become familiar with BHC law and regulations and provide for distinct governance in the form of separate director and officer positions, policies and procedures, and risk management. Based on these  considerations, BHC formation is often deferred until there is a clear purpose or need for it.

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 LinkThe 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.

Application Process

The formation of a BHC requires the prior approval of the Federal Reserve through a formal application process, which, over the years, the Federal Reserve has streamlined and simplified. Once the initial formation application is approved, additional applications are required in the future if the BHC proposes to acquire additional banks or engage in nonbanking activities. Forms utilized in the applications process are referenced below. Many activities, such as servicing its affiliates, can be conducted without a formal application, while others require only an after-the-fact notice. Each application is evaluated under established financial, managerial, and competitive standards. While most applications by well-run BHCs are acted on within 30 days, application requirements and timing will vary depending on the nature of the activity, as well as the regulatory track record of the BHC and its underlying depositories.

Bank Charter Decision Within a BHC Framework

To establish a commercial bank, the organizers can file for either a national or state charter, and if they file for the state charter, they have a further option as far as being a member of the Federal Reserve or a nonmember. The chart above shows that all bank charter types are compatible within a BHC framework.

A BHC can be formed over a commercial bank regardless of the bank’s charter type or member/nonmember status, and the policies, regulations, and supervision and reporting requirements for BHCs are not dependent on the bank charter type.

However, the BHC is always supervised by the Federal Reserve at the federal level, and if the organizers elect to become a state member bank, the Federal Reserve is also the federal supervisor at the bank level, rather than the OCC or FDIC. Therefore, some BHC organizations choose the state member bank charter in order to simplify regulatory relationships at the federal level. The Federal Reserve is then the single federal regulator responsible for supervision at both the BHC and bank levels.

Review Growing Shareholder Value for more information on BHCs, the legal framework, regulatory reporting requirements, and financial holding companies. View the accompanying chart on bank charter decision within a BHC framework. PDF


  1. Form FR Y-3, Application for Prior Approval to Become a Bank Holding Company, or for a Bank Holding Company to Acquire an Additional Bank or Bank Holding Company External Link
  2. Form FR Y-3N, Notification for Prior Approval to Become a Bank Holding Company, or for a Bank Holding Company to Acquire an Additional Bank or Bank Holding Company External Link
  3. Form FR Y-4, Notification for Prior Approval to Engage Directly or Indirectly in Certain Nonbanking Activities External Link