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.

  1. Subsidiary

    A subsidiary is an independent company that is more than 50% ...
  2. Limited Service Bank

    A limited service bank is a banking business facility that is ...
  3. Chain Banking

    Chain banking is a form of bank governance that occurs when a ...
  4. Letter Of Moral Intent

    A letter of moral intent is written to a bank from a parent company ...
  5. National Bank

    In the United States a national bank is a commercial bank, while ...
  6. Schedule II Bank

    A Schedule II bank is a Canadian bank that is a subsidiary of ...
Related Articles
  1. Personal Finance

    Retail Banking vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking refers to the aspect of banking that deals with corporate customers. Check out more on the differences between ...
  2. Insights

    The 4 Biggest Chinese Banks

    Learn how the Chinese banking system is operated and managed, and get information about the top four largest banks in the country.
  3. Personal Finance

    U.S. Banks Struggle To Reduce Branches (JPM)

    The efforts by U.S. banks to get lean by reduction in branch network are getting challenged by customers who won’t give up regular visits to the branch
  4. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against their brick-and-mortar peers. Find out what internet banks have to offer and where they fall short.
  5. Investing

    How Bank of America Holds 1/8 of All U.S. Deposits

    Bank of America isn't America's central bank, but given its size and spread, you could be forgiven this misapprehension.
  6. Insights

    Will “Internet-Only” Banks Change Chinese Banking?

    Private players offering internet-only banking services to a large section of China's population must overcome some challenges to gain market momentum.
  7. Personal Finance

    The Evolution of Banking Over Time

    Discover how the evolution of banking has changed the business model. Find out how this system of money management developed into what we know today.
  8. Investing

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  1. What are the Differences Between Affiliate, Associate and Subsidiary Companies?

    The main difference between affiliate, associate and subsidiary companies has to do with the existing level of ownership ... Read Answer >>
  2. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ... Read Answer >>
  3. What is the banking sector?

    Learn why the banking sector is a vital industry to our economy, what it does to drive the economic growth and understand ... Read Answer >>
  4. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
Trading Center