Bank holding companies: the dominant organizational form

Because bank holding companies (BHCs) are the dominant organizational form in U.S. banking, they deserve closer scrutiny. Using total deposits as the focal variable (total assets, total equity, or total revenues would provide similar pictures of domination), Table 1-2 reflects the dominance of BHCs among banks and also among federally insured depository institutions, and shows how that dominance has increased from 1984 to 1994. For example , at year – end 1994, BHCs had almost 67 percent of deposit market share among depository institution, up from 61 percent in 1984. Among banking organizations, BHCs are even more dominant, controlling 93 percent of total deposits, up from 87 percent in 1984. The number of banks a BHC controls determines its classification as a one-bank holding company (OBHC) or a multibank holding company (MBHC). As Table 1-2 shows , the average deposits size of an MBHC more than double from 1984 to 1994, going from slightly less than $1 billion in total deposits to a title more than $2 billion. To put a perspective on this distribution, the merger of Chase Manhattan and Chemical Banking in 1996 resulted in a BHC with over $200 billion in total deposits and over $ 300 billion in total assets.¹

Panel A of Figure 1-1 presents an example of a BHC’s organizational structure. A BHC’s nonbank subsidiaries or affiliates are restricted from engaging in nonbanking activities not approved by the Fed. The role of the parent company is to supply various financial, legal, accounting, and other services to its subsidiaries, for which it receives fees and interest revenue. In addition, the parent, as owner of the subsidiaries, is entitled to receive tax – deductible dividends from its subsidiaries. These dividend payments, however, are limited by federal and state laws. For example, the Fed requires approval for any dividend declaration by its members that exceeds a bank’s combined net profits for the current year and the two previous years. If the parent company is an operating company (not just a “shell”), then it generates other sources of revenue besides dividends. Panel B of Figure 1-1 shows the cash flows associated with a BHC² . After interest and other expenses are paid, the parent company usual has negative taxable income reduced federal income taxes ³.

Part 1. Introduction to Bank Financial Management in the Financial-Services Industry

Table 1-2 The Distribution of Federally Insured Depository Institution by Type of Institution, 1984 and 1994

1984_________________________

Type of Institution	Number of Firms	Percent of Total	Deposits (billions of dollars)	Percent of Deposits	Mean Deposits per Firm (millions of dollars)
Banking organization	11 342	38,0	1613,7	61,4	142,3
Independent banks	5 698	19,1	209,9	8,0	36,8
One-bank holding companies	4 926	16,5	467,7	17,8	94,9
Multibank holding companies	718	2,4	936,1	35,6	1303,7
Thrift institutions	3 414	11,4	929,1	35,4	272,3
Savings and loan associations	2 882	9,6	697,5	26,5	242,0
Federal savings banks	264	0,9	121,6	4,6	460,6
State savings banks	268	0,9	110,7	4,2	413,0
Credit unions	15 126	50,6	84,1	3,2	5,6
Total	29 882	100,0	2627,6	100,0	87,9

1994__________________________

Type of Institution	Number of Firms	Percent of Total	Deposits (billions of dollars)	Percent of Deposits	Mean Deposits per Firm (millions of dollars)
Banking organization	7 989	36,1	2382,7	71,7	301,7
Independent banks	2 634	12,0	170,0	5,1	64,5
One-bank holding companies	4 646	20,4	523,0	15,7	117,2
Multibank holding companies	800	3,7	1 689,6	50,9	2112,1
Thrift institutions	2 058	9,4	684,5	20,6	332,6
Savings and loan associations	776	3,5	147,2	4,4	189,7
Federal savings banks	756	3,5	357,5	10,8	472,9
State savings banks	526	2,4	179,8	5,4	341,8
Credit unions	11 927	54,5	254,0	7,6	21,3
Total	21 883	100,0	3 321,2	100,0	151,8

Note: The data in this table are, to the extent possible, aggregated within categories. Thus, banks that are part of the same multibank holding company are aggregated into one banking organization. Banking organizations and thrift institutions that are affiliated are counted separately, as are any combinations of the three different types of thrift institution that are under common ownership. “Chain banking” organizations – banks owned by an individual or a group of individuals but not legally affiliated - are not consolidated, owing to data limitations. ( Data may not sum to totals, and calculations may not yield the percentages shown, because of rounding.)

Source: Federal Reserve Bulletin (January 1996), p.5.

BHCs were developed primarily to circumvent geographic restrictions, especially in states that restricted branching, or for tax purpose or both. Because the BHC organizational form cannot be used to circumvent product restrictions per se, if offers no direct advantage over any other organizational form. However, if an approved nonbanking activity is a relatively riskier undertaking, placing it in a nonbank sub can be used in an attempt to isolate bank subs from the increased risk exposure.

CHAPTER 1 Overview of Banking and the Financial – Services Industry

Panel A. The structure of a bank holding company

^aOBHC= One Bank Holding Company

^bMBHC = Multi-Bank Holding Company

Panel B. The Cash flows of a bank holding company.

Source: Adapted from Eisemann and Budd (1980)

FIGURE 1-1 The Structure Cash Flows of a Bank Holding Company

The Diversity and Capitalization of Large BHCs

Panel A of Table 1-3 shows how diverse large BHCs can be with respect to total assets, banks controlled, branches, and number of employees. If you have seen one BHC, you have not seen them all. Citicorp (473 branches), Chase Manhattan (475), and First Chicago NBD (742) represent wholesale/ retail shops without the extensive brick – and – mortar branches of first Union (1 977 branches), NationsBank (1948), BankAmerica (1923), Wells Fargo (1580) and Banc One (1503). In contrast, J.P. Morgan and Bankers Trust are organizations geared toward “global wholesale finance”; their focus on trading and investment banking requires substantially fewer banks, branches and employees.

Table 1-3 The Diversity and Capitalization of large Bank Holding Companies