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A bank holding company is a corporation which has a controlling interest in one or more banks. While the primary focus of such a corporation is the banks it controls, it can also have interests in other types of financial companies, such as a company which executes stock market trades. There are a number of advantages to being a bank holding company which have made it can appealing option for certain types of companies, including banks which have converted to holding companies.
Regulatory laws surrounding bank holding companies vary by nation. As a general rule, these corporations are subject to more government regulation and scrutiny than banks, but they also benefit from more financial protections. Some companies view this is an acceptable tradeoff, since the regulation is usually not onerous, and may in fact be quite sensible. The government, for example, may limit the total amount of debt a bank holding company can carry, which is something the company may do on its own.
Bank holding companies have much more access to capital than the banks they control. This is why some banks in danger of failing may opt to convert to bank holding companies. If they feel that their finances can be reconstructed and it is possible to stay in business with an injection of capital, they can convert and generate assets. Bank holding companies also have more financial flexibility than ordinary banks, which can be a valuable tool when the market is volatile.
These corporations drew a great deal of attention in the United States in 2008-2009, when an ongoing financial crisis spurred a number of famous companies to convert themselves into bank holding companies. These companies had an additional incentive to convert, as funds released under the Troubled Assets Relief Program (TARP) were primarily aimed not at banks, but at bank holding companies, and as a result, banks needed to convert to access these funds if they wanted to be a part of the program.
As with other types of financial companies, the performance of a bank holding company depends on a lot of factors. Making sound financial decisions is critical, and ethical business practices can also be important; practices which skirt the margins of the law may result in problems for the bank holding company along the line, even if they appear acceptable during periods of prosperity. Varying degrees of government regulation can also be an influence on company performance, and may also complicate evaluations of company performance.
Can you list more benefits and disadvantages of being a bank holding company? let's use Goldman Sachs and Morgan Stanley as an example in 2008. Thank you.
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