United States: Do Banks Have A Fiduciary Duty To Shed Their BHC Status?

Last Updated: September 23 2016
Article by V. Gerard Comizio

The last thirty years have witnessed a dramatic rise in bank adoption of the bank holding company ("BHC") structure. Inherent in this trend is an apparent accepted orthodoxy about the need of such structures from both a business and regulatory perspective. The percentage of U.S. banks owned by BHCs has more than doubled since 1980, from 34.3% to approximately 84% today.1

Federal banking agencies ("FBAs"), however, do not require banks to form a BHC.2 Thus, the uptick in BHC-owned banks has largely been driven by perceived legal, regulatory, and business advantages. Since 1980, the majority of banks presumably (1) identified significant advantages to forming a BHC that outweighed the increased costs of corporate governance and regulatory compliance and/or (2) saw their peers forming BHCs and generally accepted this industry trend as the orthodoxy of modern banking organization 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 ("Dodd-Frank"). 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.5This diversity calls into question the need for a BHC.

In our recent article, we trace how the perceived advantages of BHCs once held over banks have been steadily eroding, while the regulatory burdens imposed on BHCs have been significantly increasing, especially following the 2010 enactment of Dodd-Frank.6 Given the growing regulatory burden on BHCs in conjunction with the expanding range of activities that banks may engage in without them, the BHC structure may no longer be the most advantageous corporate structure for many banks, especially those engaged primarily in banking and certain financial services activities.

Need for Each Bank to Reevaluate 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.7 Thus, director leadership responsibilities include informed decision-making regarding corporate policies and strategic goals. From a fiduciary prospective, 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.'"8 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."9

In this context, a corporate governance review should include an assessment of regulatory compliance and corporate governance costs and a consideration of what corporate structure is optimal for the entity to best maximize profitability, streamline regulatory burdens—consistent with the institution's business plans—and operate safely and soundly.10 Given the decreasing advantages and significantly increased disadvantages—primarily mounting compliance costs associated with BHCs—banks should evaluate the relative merits of a BHC structure.

Expansion of Bank Powers Decrease the Need for BHCs

Although BHCs may still engage in a wide range of activities, the gap between permissible BHC and permissible bank activities has, as a practical matter, substantially narrowed for most of the banking industry. Today, national banks and their operating subsidiaries are permitted to engage in a broad array of financial activities previously reserved for BHCs.11 The powers of state-chartered banks have likewise expanded as most states enacted "wildcard" statutes permitting their state chartered banks to engage in the same activities permissible for national banks.12 Banks can conduct, among other things, certain financial, investment and economic advisory services; provide transactional advice; and engage in various insurance and annuities activities as well as securities activities.13 Given the evolution and expansion of bank powers, many of the advantages of operating within the BHC structure have eroded.

Reduced Benefits of the BHC Structure

The waning benefits of the BHC structure are not limited to the reduced gap between authorized BHC and bank activities. Other traditional BHC benefits have also diminished or evaporated.

  • Bank Subsidiaries—Historically, the BHC structure was the primary means of acquiring and holding multiple bank subsidiaries due to interstate banking prohibitions, but these interstate banking prohibitions have been eliminated.14
  • Preferential Treatment of Debt—The previously preferential treatment of debt at the BHC level has largely evaporated. Prior to Dodd-Frank, the BHC structure facilitated double leverage where a BHC could engage in trust preferred securities ("TruPS") financing, which could be counted as capital at the BHC level and where the proceeds could be counted as Tier 1 capital at the bank level.15 This is no longer the case. The Collins Amendment to Dodd-Frank, along with the related Federal Reserve rules and policies, has largely eliminated TruPS and similar hybrid debt securities from being included in regulatory capital.16
  • Director/Officer Liability—BHCs once had an advantage over banks with respect to director and officer liability. Banks once were restricted by the corporate governance provisions of the state of their headquarters, while BHCs had the flexibility to select their state of incorporation, allowing them to select states with more favorable indemnification and liability laws. But, in 1986, national banks were granted similar flexibility by the OCC,17 which allowed national banks to adopt corporate governance provisions in their bylaws from a number of jurisdictions, e.g., from the home state of the bank, BHC, Delaware, or Model Business Corporation Act.18
  • Executive Compensation—Executive compensation and indemnification by all banks and BHC are now subject to compliance with the same statutory and FBA regulatory requirements.19 Additionally, Section 956 of the Dodd-Frank Act requires the federal banking/agencies to develop rules to "curb excessive compensation at financial services organizations,"20 which includes both BHCs and banks.21

Some Remaining Advantages

Notwithstanding the erosion of advantages and mounting regulatory burdens of the BHC structure, BHCs continue to offer certain key advantages.

  • Minority Investments—Unlike a bank, a BHC may own up to 5% of the voting shares of any other company without prior regulatory approval.22
  • FHCs' Expansive Powers—Furthermore, BHCs that qualify as financial holding companies ("FHCs") enjoy additional advantages, for FHCs may engage in activities that are "financial in nature" beyond what is allowable for banks,23 including securities underwriting and dealing, insurance underwriting, and merchant banking—activities largely undertaken only by the nation's largest banking organizations.24


[1] Bank Holding Companies and Financial Holding Companies, Partnership for Progress, (last visited Feb. 22, 2016).

[2] See id. (encouraging organizations to individually consider the advisability of forming a BHC and noting that the Federal Reserve is neutral on their creation).

[3] See, e.g., Bank Information of Comenity Bank, FDIC, (last visited Feb. 17, 2016) (follow "Financials" hyperlink) (indicating that Comenity Bank has less than $10 billion in total assets).

[4] See, e.g., Bank Information of Signature Bank, FDIC, (last visited Feb. 17, 2016) (follow "Financials" hyperlink) (indicating that Signature Bank has a little over $30 billion in total assets).

[5] See, e.g., Bank Information of First Republic Bank, FDIC, (last visited Feb. 17, 2016) (follow "Financials" hyperlink) (indicating that First National Bank has over $50 billion in total assets).

[6] Dafna Avraham et al., A Structural View of U.S. Bank Holding Companies, 18 Fed. Res. Bank N.Y. Econ. Pol'y Rev. 65, 67 (July 2012), ; see also 12 C.F.R § 225.84 (2015).

[7] Am. Bar Ass'n, Corporate Director's Guidebook, 56 The Bus. Lawyer 1517, 1578 (3d ed., Aug. 2001); The ClearingHouse, Guiding Principles for Enhancing Bank Organization's Corporate Governance: Exposure Draft for Public Comment 9 (Sept. 10, 2014); see also Am. Bankers Assn., Corporate Governance for Mutuals (2007); Am. Bankers Ass'n., The Board's Role in Strategic Planning (2004) ("ABA CORP. GOV.").

[8] ABA CORP. GOV. at 3.

[9] Id.

[10] See id. at 2, 8.

[11] See generally OCC, Compendium of Activities Permissible for a National Bank, (April 2012) ("OCC Compendium") listing a broad array of activities permissible for national banks and their subsidiaries).

[12] Christine E. Blair & Rose M. Kushmeider, Challenges to the Dual Banking System: The Funding of Bank Supervision, 18 FDIC Banking Rev. 1, 14 (2006) (discussing how state statutes have allowed state chartered banks to engage in all activities permissible for national banks.

[13] See generally OCC Compendium, supra note 11 (listing permissible activities for national banks).

[14] See Mehrsa Baradaran, Reconsidering the Separation of Banking and Commerce, 80 Geo. Wash L. Rev 385, 400 (2012) (indicating that, before the Riegle-Neal Interstate Banking Act, interstate bank prohibitions provided BHCs with a competitive advantage as the primary way to engage in banking in multiple states); Carl A. Sax & Marcus H. Sloan III, Legislative Note, The Bank Holding Company Act Amendments of 1970, 39 Geo. Wash. L. Rev. 1200, 1208 (1971).

[15] Alan Faircloth, ViewPoint: Spotlight: A Guide to Trust Preferred Securities, 27 Fin. Update 1 (2014),

[16] Id. (noting that TruPs no longer constitute Tier 1 capital for BHCs with greater than $15 billion in assets).

[17] 61 Fed. Reg. 4849, 4866 (Feb. 9, 1996).

[18] See 12 C.F.R. § 7.2000 (2015).

[19] See 12 U.S.C. § 1828(k) (2006 & Supp. 2011) (granting FDIC authority to prohibit or limit, by regulation or order, any golden parachute or indemnification payment); See 12 C.F.R. §§ 359.2, 359.3 (2012); see also 12 C.F.R. § 359.2 (2012).

[20] Francine McKenna, Dodd-Frank Rule to Curb Bank incentive Pay Likely Last to Finish Line, MarketWatch (July 16, 2015, 9:18 AM), Dodd-Frank, Pub. L. 111–203, § 956(e)(2), 124 Stat. 1906 (2010) (codified as 12 U.S.C. § 5641).

[21] Joint Press Release, Bd. of Governors of the Fed. Reserve Sys., Agencies Seek Comment on Proposed Rule on Incentive Compensation (Mar. 30, 2011), ("requir[ing] compensation practices at regulated financial institutions to be consistent with three principles—that compensation arrangements should appropriately risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance").

[22] Bank Holding Company Act, 12 U.S.C § 1843(c)(6) (2012).

[23] Id. § 1843.

[24] Id. § 1843(k)(4).

Originally published by Harvard Law School Forum on Corporate Governance and Financial Regulation and American University Business Law Review.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.