A bank holding company is an entity that has ownership and ultimate control of one or more banking institutions. The ownership may be direct or indirect, and be held by a corporation or some other type of business. In the United States, specific guidelines for what constitutes a bank holding company are set forth in the Bank Holding Company Act of 1956, with the Federal Reserve System having the responsibility of evaluating the status of any entity that holds claim to being this type of holding company.
According to regulations set forth in this act, the entity seeking the status of a bank holding company must meet several criteria. This includes the ownership and control of at least twenty-five percent of the stock issued by the bank or banks, and the ability to vote on matters pertaining to the function of the institution. The application to be recognized as a bank holding company must be approved by the Federal Reserve Board of Governors.
There are a number of reasons why a bank holding company may be formed. One of the more common reasons is to handle the efficient and orderly management of bank mergers. The holding company serves as the means whereby the separate entities are systematically merged into a single business entity, making sure to remain within capital standards set by the Federal Reserve. Upon completion of the merger process, the holding company may be dissolved, or continue to function for a period of time, depending on the desires of the board that governs the company itself.
Banks and other lending institutions sometimes restructure into holding companies during periods of economic downturn, such as recessions. The approach makes it possible for the banks to have more flexibility in terms of funding and liquidity options. Smaller banks may also seek status as a bank holding company for these same reasons, allowing them to remain functional during the harder economic period. Some may choose to restructure again once the financial crisis has passed, or remain as a bank holding company for an extended period of time.
It is not unusual for a bank to restructure into a bank holding company as a means of dealing with corporate raiders who are attempting a hostile takeover of the institution. This approach can effectively prevent the raider from obtaining a controlling interest in the bank or group of banks, and allow the institutions to continue functioning much as they always have. As with those banks who choose this route as a way of dealing with a recession, banks that gather under the umbrella of a holding company to defeat a takeover attempt may also choose to remain as a holding company for as long as they see value in the arrangement.