Why We Need to Restructure the Big Bank Holding Companies

From  American Banker
July 10, 2014


Many contributors helped bring about the most recent financial crisis, bank holding companies among them. The problems with bank holding companies stem less from lax rules or weak enforcement than from the way they are structured.

Bank holding companies are currently structured as financial malls of “shops” offering financial intermediations: brokerage, underwriting, mutual and trust funds, insurance, a securitization machine, custody services and a bank. In regular malls, each store is owned and regulated separately. Customers and investors determine a shop’s success and failure. By contrast, bank holding companies own all of the mall’s shops and collect their revenues. Their top management teams reward the shops’ executives and employees.

This structure creates two big problems. First, large bank holding companies defy effective management. They are complex and act globally, making it hard for management to control risky transactions. Management must also act under conflicting pressures. On one hand, they are expected to limit risk in order to protect government-insured deposits. On the other, they are expected to perform for investors and generate higher revenues, which might involve taking on more risk.

The structure of large bank holding companies also defies effective regulation. The shops’ regulators, and the policies of those regulators, differ. The objective of the Securities and Exchange Commission is to protect investors by requiring companies to provide proper disclosures and abide by fiduciary duties, rather than to ensure the safety and soundness of the intermediaries. By contrast, bank regulators are less concerned with protecting investors than with bank safety and soundness and protecting the Federal Deposit Insurance Corp. and depositors. The raging debate about whether bank holding companies should be allowed to trade securities on their own accounts demonstrates the issue.

What should be done to protect the country from the risks taken by the large bank holding companies?..


Read the article at: www.americanbanker.com