Three Financial Problems Facing Bank Holding Companies: Comment

Abstract

Bank holding companies must make decisions with respect to three ongoing financial problems: 1. how much debt to acquire; 2. where within the holding company (i.e., at the parent level or at the subsidiary level) to place the debt; 3. how the funds raised through debt should be allocated throughout the system. The way a one bank holding company decides these issues affects its probability of default and exposure to charges of conflicts of interest by various shareholders. All holding companies face these three financial problems. However, various sections of the Federal Reserve Act limit the loans a bank can make to its affiliates and the dividends that it can pay to its shareholders. As a consequence, a one bank holding company operates with different constraints and is probably less flexible with respect to funds transfers than are the holding companies in other industries. The first section of this paper reviews the factors that have contributed to the rapid growth of the one bank holding company, and the second evaluates some financial aspects of the acquisitions that holding companies have recently made. (This study was completed in July, 1971.) With this material as background, the third section then analyzes the three ongoing financial problems described above.