What Is a Multibank Holding Company?
A multibank holding company is a parent company that owns or controls two or more commercial banks. Because of their conglomerate status, they are subject to more regulations and oversight than standalone banks, but at the same time also have more options for raising capital due to their larger size and greater diversity.
A multibank holding company may be contrasted with a one-bank holding company, which controls 25% or more of the voting rights in a single bank.
- A multi-bank holding company is a corporate structure where the parent company owns several bank subsidiaries.
- Multi-bank holding companies are subject to regulation from the Bank Holding Company Act of 1956 to discourage concentration and prevent anti-competitiveness.
- While subject to greater regulation, multi-bank holding companies typically find it easier to raise capital and have the benefit of diversification across types of borrowers and geographic regions.
How Multibank Holding Companies Work
The rise of multibank holding companies has much to do with geographic diversification and the impact of regional economics. Historically, commercial banks, such as savings & loans and community banks, served the geographic area immediately surrounding the physical location of the bank itself. If the businesses in the surrounding area all failed in large enough numbers at the same time, the banks would not be able to stay open because a large portion of their loan portfolio would default all at once.
This could happen, for example, if a particular region relied heavily on industrial manufacturing where most businesses are factories, if the manufacturing sector takes a hit then these firms will all be negatively impacted similarly.
This can also be due to a concentration of agricultural enterprises. During the Great Depression, for example, the failure of large numbers of farms resulted in many banks across the United States having to close.
Multibank holding companies provide a level of diversification, as a company with banks across several different communities in several different geographic areas ostensibly carries less risk than a company with only one bank in one concentrated area. The creation of subsidiaries allowed individual banks to combine administrative operations, which reduced costs while also allowing them to tap into their holding company’s assets in times of crisis.
As of 2021, the largest multi-bank holding company in the U.S. is JP Morgan Chase, followed by Bank of America. Citigroup, and Wells Fargo.
Branch Banking vs. Unit Banking
Multibank holding companies are governed by the Bank Holding Company Act of 1956 and its amendments. The Act was designed to check the expansion of banks and to ensure that they had separate banking and non-banking functions. Banks that are members of the National Association (N.A.) can have bank locations in several states and may even operate internationally.
Until 1994, many states restricted or even prohibited branch banking to promote more localized independent unit banking. Branch banks are connected to one or more other banks in an area or outside of it. Unit banks are single, small entities that provide financial services to their local community.
Unit banks and branch banks offer the same financial services. Branch banks offer more stability during a financial crisis with the support of a parent institution. Unit banks are commonly affected by events that may negatively affect a local economy.