What Is a Subsidiary Bank?

A subsidiary bank is a type of foreign entity that is located and incorporated in a foreign country but is either wholly-owned or owned in a major part by a parent corporation in a different nation. This particular banking model helps the parent company avoid unfavorable regulations enforced by the home country. Subsidiary banks don't adhere to regulations that apply in the home country or nations where the parent company is incorporated. Instead, they operate under the laws and regulations of the host country. 

Key Takeaways

  • A subsidiary bank is a type of foreign entity that is located and incorporated in a foreign country but is majority-owned by a parent corporation in a different nation.
  • Subsidiary banks only have to operate under the laws and regulations of the host country. 
  • This particular banking model helps the parent company avoid unfavorable regulations enforced by the home country.
  • Subsidiary banks are typically unable to offer a full suite of retail banking services.

How a Subsidiary Bank Works

A subsidiary bank permits a parent bank to perform certain activities in the host nation. Within the framework of this model, a parent bank can establish a banking presence associated with the buying and selling of securities. The platform would benefit a bank in the U.S., for example, looking to expand investment banking and trading operations in the United Kingdom. A parent company must charge a fee consistent with the host country for services rendered. This assures incoming banks remain competitive with domestic financial institutions, as well as other foreign-owned banks present in the nation.

Subsidiary banks are typically unable to offer a full suite of retail banking services. The sheer size of loans a subsidiary bank can originate pale in comparison to a foreign branch bank. Subsidiary banks reconcile this shortcoming by excelling in other activities like underwriting securities. 

Subsidiary Bank vs. Foreign Branch Bank vs. Affiliate Bank

Subsidiary banks and foreign branch banks differ in the various services they can offer customers. For instance, foreign branch banks are bound by regulations that apply to the parent company and the country where the bank operates. Furthermore, branch banks can originate larger loans than a subsidiary bank because assets held by the parent company influence loan sizes.

Conversely, a subsidiary bank can underwrite securities, whereas most bank branches focus on retail services. Choosing an international banking model ultimately depends on how the company intends to operate in the host nation. For example, a U.S. bank that intends to sell securities in Canada should form a subsidiary bank. However, a bank that wishes to make loans may decide to look to a bank branch format.

An affiliate bank is one that is only partially owned, but not controlled by its foreign parent. Both subsidiary and affiliate banks operate under the banking laws of the country in which they are incorporated. Both subsidiary banks and affiliate banks are allowed to engage in security underwriting.