By Chris Marinac | July 14, 2017
A handful of bank holding companies (BHCs) have been merged or liquidated into their bank subsidiaries in recent years to eliminate their holding companies. Most recently, Bank of the Ozarks garnered significant industry interest when it eliminated its BHC by merging it into the bank on June 26, 2017.
The FIG Research team thinks several financial institutions could find it appealing to replicate Bank of the Ozarks’ recent elimination of its bank holding company structure in favor of a simplified bank charter.
Most banks have bank holding companies. BHCs have been formed primarily to facilitate additional non-banking activities, issue capital instruments not deemed capital for banks, and/or for greater corporate, financial and operational flexibility. BHCs have been especially useful for organizations that are very large and/or engaged in non-banking and financial holding company activities. They have also been useful for small BHCs, banks and thrifts with less than $1 billion in consolidated assets eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement.
The Policy Statement allows small BHCs to incur debt, including senior debt and secured debt, in greater amounts than BHCs, generally. Small BHCs’ capital adequacy is also tested at the bank level only, and small BHCs can use debt for acquisitions or stock repurchases, or for contributions to the subsidiary bank’s capital.
We believe investors should consider which other banks could implement a similar initiative. New industry analysis, Do Banks Need Holding Companies?, from Jones Day and attorney Chip MacDonald, examines the advantages and disadvantages of BHCs following the Dodd-Frank Act, the Basel III capital rules and the latest changes to the Policy Statement.
The Jones Day analysis is worthy of consideration – we think Bank of the Ozarks is not the only bank to examine this alternative.