Over the past thirty years, U.S. banks have largely opted into the bank holding company (BHC) structure. Indeed, BHC structure brings with it a number of advantages from legal, regulatory, and business perspectives.  But in recent years with significant increases in regulation of BHCs and the associated restrictions on activities and higher compliance costs, BHC structure may not now be the optimal structure for every bank. 

In a recent piece on the Harvard Law School Forum on Corporate Governance and Financial Regulation, V. Gerard Comizio at Paul Hastings LLP explores why banks should reexamine their BHC status, as well as whether banks have a fiduciary duty to do so.  

Comizio points out that BHC structure is not required for federal banking agencies to operate.  And while 84% of US banks are currently owned by BHCs, that still leaves a significant number who have, for one reason or another, decided to remain outside of the structure.  

"Despite the emergence of BHCs as the “must have” organizational structure for the banking industry, approximately 16% of U.S. banks have opted to remain outside of the BHC structure. This statistic suggests at the very least that, for certain banks, the perceived advantages of forming a BHC are not compelling. This rate of hold-outs suggests that the BHC structure’s advantages do not always outweigh the structure’s ever-increasing bank regulatory compliance and corporate governance costs, particularly as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act."

Comizio also observes that the holdouts are not merely small banks or specialty banks, but run the gamut.

"Notably, the hold-out banks are not limited to one particular size or business model. Instead, they range from small community banks with less than $10 billion in total assets, [3] to mid-sized banks with $30 billion in total assets and a number of non-bank subsidiaries engaged in broker-dealer and investment advisory activities, [4] and to large regional banks with total assets exceeding $50 billion."

It is this diversity of banks that have opted out of BHC status that Comizio says demonstrates that banks should reexamine whether BHC status is still right for them. Given the myriad new restrictions, regulatory burdens, and increased compliance costs imposed on BHCs as a result of the Dodd-Frank Act, according to Comizio, it is incumbent upon bank boards to reevaluate the merits of BHC structure.

"As a general matter, one of a corporation’s primary objectives is to conduct its business activities to maximize corporate profit and shareholder gain. [citation omitted] Thus, director leadership responsibilities include informed decision-making regarding corporate policies and strategic goals. From a fiduciary perspective, bank management bears a specific responsibility to periodically review its corporate and governance structure. In addition, the federal banking agencies have emphasized that 'financial institutions are encouraged to periodically review their policies and procedures related to corporate governance … matters.’ [citation omitted] In this context, fiduciary duty requires management to periodically 'evaluate which corporate governance policies and procedures are more appropriate [for an institution’s] size, operations and resources.'”

This duty to reexamine BHC structure is even more necessary given that the "gap between permissible BHC and permissible bank activities has, as a practical matter, substantially narrowed for most of the banking industry.” Along with the expanded list of activities available to non-BHC banks, Comizio also points out that “other traditional BHC benefits have also diminished or evaporated.”  These include ability to acquire subsidiaries, preferential treatment of BHC debt, more flexibility in limiting director and officer liability, and more freedom to structure executive compensation.  

While some advantages of BHCs still exist, like regulatory exemption for minority investments in other companies and some exemptions for BHCs that qualify as financial holding companies, with increased compliance costs, activity restrictions, and the ability of many state chartered and national banks to engage in activities previously restricted to BHCs, bank directors would be wise to take a fresh look at whether BHC structure is still the ideal arrangement for their particular institutions.

V. Gerard Comizio’s blog post is: Do Banks Have A Fiduciary Duty to Shed Their BHC Status?