DEFINITION of 'Subsidiary Bank'

A subsidiary bank is a type of foreign entity that is located and incorporated in a foreign country but majority owned by a parent corporation in a different nation. For example, London-based Merrill Lynch International is Bank of Americas (BAC) largest operating subsidiary outside of the United States. 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. 

BREAKING DOWN 'Subsidiary Bank'

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 US, 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. As in most financial services, it is important to compare rates across all available options in addition to the terms and conditions that apply to customer accounts. 

That said, subsidiary banks are 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" and Foreign Branch 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 country where the bank operates. Furthermore, branch banks can originate larger loans than a subsidiary bank, as assets held by the parent company influence loan sizes.

Conversely, a subsidiary bank can underwrite securities whereas 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 US bank that intends to sell securities in Canada should form a subsidiary bank, but a bank that wishes to make loans can look to a bank branch format. Determining this beforehand will make it easier for banks to make a decision on the type of banking model to pursue.

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