Question

Compare and contrast the structures of banking holding companies, financial holding companies, and universal banks.

Answer 1

BANKING HOLDING COMPANY

It is a company that controls one or more banks, but does not necessarily engage in banking itself.

In the united states, a bank holding company, as provided by the Bank Holding Company Act of 1956,is broadly defined as “ANY COMPANY THAT HAS CONTROL OVER A BANK”.

It makes easier for the firm to raise capital than earlier. It also has a greater legal authority to conduct share repurchase of its own stock

Bank holding companies act of 1956 establishes the terms and condition according to which a company can own a bank and authorizes the Federal Reserve to adopt the regulation. Some of the key concepts are:

i). Responsible supervisory agency

ii). Bank investments: Investments by a BHC in additional banks exceeding 5% of the target’s bank outstanding voting shares also require prior approval

iii).Non banking investments: A BHC may engage in or establish or acquire subsidiaries that engage in non banking activities determined by Federal Reserve board to be closely related to banking.

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

FINANCIAL HOLDING COMPANIES
BHC may declare itself a FINANCIAL HOLDING COMPANY and thereby engage in financial activities, including securities underwriting and dealing, merchant banking activities, insurance agency and underwriting activities

For BHC to be eligible to declare itself an FHC, BHC’s depository institution subsidiaries must be well capitalised, managed in a best way, and have good ratings under the community reinvestment act.

BHCs and FHCs: FHC as a hybrid form of BHC that has additional authority to make financial investment.

UNIVERSAL BANKS:

Universal banking is a banking system in which bank provides a wide variety of financial services, including commercial and investment services. However, banks are required to separate their commercial and investment banking services.

Universal bank offer credit, loans, deposits etc. Universal banking combines the services of commercial bank and investment bank, providing all services within one entity

FHC and universal bank: FHC is a group having substantial interest in all sort of financial business.FHC’s are different from universal bank in the sense that in case of FHC’s various activities are undertaken through different subsidiaries, where as in universal banking, the bank is free to choose the activities it wants to carry out.