DEFINITION of Chain Banking

Conceptually, chain banking is a form of bank governance that occurs when a small group of people control at least three banks that are independently chartered. In general, the controlling parties are majority shareholders or the heads of interlocking directorates. Chain banking as an entity has declined along with the surge in interstate banking.

BREAKING DOWN Chain Banking

Chain banking is not like branch banking, which involves conducting banking activities (e.g. accepting deposits or making loans) at facilities away from a bank's home office. Branch banking has gone through significant changes since the 1980s. It also differs from group banking.

In group banking, several affiliate banks exist under a single bank holding company. In chain banking, three or more banks function independently without the traditional obstacles of a holding company. A bank holding company is a parent corporation, limited liability company or limited partnership that owns enough of the original bank’s voting stock to control its policies and management. The activities of separate banks within chain banking don't overlap (as occasionally occurs in a holding company) so that the revenue is maximized as much as possible.

Chain Banking Versus Interstate Banking

Interstate banking grew significantly in the mid-1980s, a time during which state legislatures passed new laws that allowed bank holding companies to acquire out-of-state banks on a reciprocal basis with other states. As noted above, the rise in interstate banking has correlated with a decline in chain banking.

Interstate banking grew in three phases. The first began in the 1980s with regional banks, which formed when smaller, independent banks merged to create larger banks. Following this the Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks which met capital requirements to acquire banks in any other state after Oct. 1, 1995. These legislative acts resulted in the onset of nationwide interstate banking.

Chain Banking and Investment Banking

Chain banking is distinct from investment banking in that investment banks create capital by underwriting new debt and equity securities, aid in the sale of securities, and facilitate mergers and acquisitions, reorganizations and broker trades, along with providing guidance to issuers regarding the issue and placement of stock. Investment banks are by nature interstate (and international), given that many deals, which investment banks broker, include investors worldwide.

Many investment banking systems are subsidiaries of bulge bracket firms like Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America Merrill Lynch and Deutsche Bank.