Full text of Federal Reserve Bank of New York Circulars : 10167. Policy Statement on Responsibility of Bank Holding Companies to Act as Sources of Financial and Managerial Strength to Their Subsidiary Banks

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FEDERAL RESERWE BANK
OF MEW YORiC

[

Circular No. 10167 "Ij
May 7, 1987

Policy Statement om Responsibility off Bank Holding
Companies to Act as Sources off Financial and Managerial
Strength to Their Subsidiary Banks
To All Bank Holding Companies, and Others
Concerned, in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has issued a policy
statement on the responsibility of bank holding companies to act as sources of fi­
nancial and managerial strength to their subsidiary banks. It reiterates in detail a
general policy that has been expressed on numerous occasions in accordance with
authority that is provided under the Bank Holding Company Act and the enforce­
ment provisions of the Federal Deposit Insurance Act.
The policy statement is printed on the following pages. It is effective immedi­
ately. However, the Board will accept comment, for review by the Board, through
July 1, 1987.
Questions on this matter may be directed, at this Bank, to Gerald P. Minehan,
Assistant Chief Examiner, Multinational Banking Department (Tel. No.
212-720-5881).
E. G erald C orrigan ,

President.

FEDERAL RESERVE SYSTEM
12 CFR Part 261
(Docket NOo R-0602)
POLICY STATEMENT ON THE RESPONSIBILITY OF BANK
HOLDING COMPANIES TO ACT AS SOURCES OF
STRENGTH TO THEIR SUBSIDIARY BANKS
AGENCY s

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM0

ACTIONi

POLICY STATEMENT

SUMMARYs

Pursuant to its authority to regulate bank holding

companies

under

Deposit

the Bank Holding

Insurance

Supervision Act

Aet^

and

Company Act „ the Federal

the

International

Lending

the Board of Governors of the Federal Reserve

System issues a reaffirmation of

its longstanding policy that

bank holding companies should act as sources of strength to
their subsidiary banks by standing ready to use

available

resources to provide adequate capital funds to subsidiary banks
during periods of financial stress or adversity0
EFFECTIVE DATEs

April 24? 19870

Comments must be received by

July 1, 1987 o
ADDRESS s
policy

Interested parties may submit comments concerning the

statement

for

the Board°s

review,,

Comments

should

include reference to

Docket No0 R-0602 and should be mailed to

the Secretary^

of Governors

System^

Board

of the Federal Reserve

20th and Constitution Avenue^

N o 0^ Washington^ D 0C 0
W

20551 or delivered to the guard station in the Eccles Building

Courtyard on 20th Street? NoWo
and c Street N 0W e)

(between Constitution

Avenue

Comments may be inspected in Room B-1122

between 8:45 a 0m o and 5:15 p 0m e weekdays? except as provided in
section 26106(a) of the Board5s Rules Regarding Availability of
Information

(12 C 0F 0R 0 §26106(a))0

FOR FURTHER INFORMATION CONTACT:

Stephen Co Schemering? Deputy

Associate

Banking

Director?

Regulation?
Associate

(202)

452=2433?

Director?

Regulation?

Division of

Supervision

or Richard Spillenkothen?

Division of

Banking

Supervision

and
Deputy
and

(202) 452=2594? or for the hearing impaired only?

Telecommunications Device for the Deaf (fTDDc
3
M? Earnestine Hill
or Dorothea Thompson (202) 452=3544? Board of Governors of the
Federal Reserve System? Washington DoCo 20551o
SUPPLEMENTAL
situations

INFORMATION:

where

notwithstanding

a bank

The

Board

has been

has become

threatened with

aware of
failure

the availability of resources to its parent

bank holding company,, In order to assure

that

the BoardBs

policy that bank holding companies serve as sources of strength
to subsidiary

banks

is fully understood

by

bank

holding

companies? the Board believes it appropriate to issue a general
policy statement reaffirming and articulating these principles?
and

confirming

that

the

policy

applies

in failing

bank

situations,, This long-standing policy has been recognized by
the Supreme Court in its decision in Board of Governors v e
First Lincolnwood Corp6? 439 U DS e 234

(1978 )? and has been

incorporated explicitly in the Board°s Regulation Y? 12 C eF 0R 0
§225.4(a )(1).

The Board invites interested parties to comment

2

on this policy and intends to review the Policy Statement in
light of such comments,.

POLICY STATEMENT ON THE RESPONSIBILITY OF
BANK HOLDING COMPANIES TO ACT AS
SOURCES OF STRENGTH TO THEIR SUBSIDIARY BANKS
A fundamental and long-standing principle underlying
the Federal

Reserve's

supervision

and

regulation

of

bank

holding companies is that bank holding companies should serve
as sources
subsidiary

of

financial

banks0

It

and managerial

strength

to their

is the policy of the Board that in

serving as a source of strength to its subsidiary banks^ a bank
holding company should stand ready to use available resources
to provide adequate capital
during periods

funds

to

its subsidiary banks

of financial stress or adversity and should

maintain the financial flexibility and capital^raising capacity
to obtain additional resources for assisting its subsidiary
banks in a manner consistent with the provisions of this policy
statement.
Since the enactment of the Bank Holding Company Act in
1956*, the Board has formally stated on numerous occasions that
a bank holding company should act as a source of financial and
managerial strength to its subsidiary banks,,
Court

recognized

in the

1978

First

3

As the Supreme

Lincolnwood

decision*,

Congress has expressly endorsed the Board0s long-standing view
that a holding company must serve as a ^source of strength to

2

subsidiary financial institutions." /
pronouncements
decision*

over

the years

In addition to frequent

and the

1978 Supreme Court

this principle has been incorporated explicitly in

Regulation Y since 1983.

In particular* Section 225.4(a)(1) of

Regulation Y provides that:
A bank holding company shall serve as a
source of financial and managerial strength to
its subsidiary banks and shall not conduct its
operations in an unsafe or unsound manner.
The important public policy interest in the support
provided by a bank holding company to its subsidiary banks is
based upon the fact that* in acquiring a commercial bank*

a

bank holding company derives certain benefits at the corporate
level

that

result*

in

part*

from

the

ownership

of

an

institution that can issue federally insured deposits and has
access to Federal Reserve credit.

The existence of the federal

^safety net” reflects important governmental concerns regarding
the

critical

institutions

fiduciary

responsibilities

as custodians

of

depository

of depositors0 funds

and

their

strategic role within our economy as operators of the payments

1/

Board of Governors v. First Lincolnwood Corpe* 439 U.So
234* 252 (1978) * citing S. Rep. No. 95-323* 95th Cong.* 1st
Bess. 11 (1977).

4

system and impartial providers of credito

Thus* in seeking the

advantages flowing from the ownership of a commercial bank*
bank holding companies have an obligation to serve as sources
of strength and support to their subsidiary banks0
An

important

determinant

of

a bank®s

strength is the adequacy of its capital base*

financial

Capital provides

a buffer for individual banking organizations to absorb losses
in

times

of

financial

strain*

promotes

the

safety

of

depositors8 funds* helps to maintain confidence in the banking
system*

and

supports

the

reasonable

expansion

of

banking

organizations as an essential element of a strong and growing
economy*

A strong capital cushion also limits the exposure of

the federal deposit

insurance fund to losses experienced by

banking institutions0

For these reasons*

the Board has long

considered adequate capital to be critical to the soundness of
individual

banking

organizations

and

to

the

safety

and

stability of the banking and financial system*
Accordingly*

it is the Board0s policy that

a bank

holding company^ should not withhold financial support from a
subsidiary bank in a weakened or failing condition when the
holding company is in a position to provide the support*

A

bank holding company8s failure to assist a troubled or failing
subsidiary bank under these circumstances would generally be
viewed as an unsafe and unsound banking practice or a violation
of Regulation
prepared

to

¥ or both*
take

Where

supervisory

necessary*

action

5

to

the Board

require

such

is

assistance„

Finally^ the Board recognizes that there may be

unusual and limited circumstances where flexible application of
the principles set forth in this policy statement might be
necessary*,

and the Board may

from time

to time

identify

situations that may justify exceptions to the policy*
This

statement

is

not

meant

to

principles of supervision and regulation?

establish

new

rather*, as already

noted*, it builds on public policy considerations as reflected
in banking
Reserve

laws

and

regulations

and

long-standing Federal

supervisory policies and practices*

A bank holding

company0s failure to meet its obligation to serve as a source
of

strength

to

its

subsidiary

bank(s)*,

including

an

unwillingness to provide appropriate assistance to a troubled
or failing bank^ will generally be considered an unsafe and
unsound banking practice or a violation of Regulation Y, or
both*, particularly if appropriate resources are on hand or are
available to the bank holding company on a reasonable basis*
Consequently^
issuance
action

such a failure will

of a cease-and-desist
as

authorized

under

generally result in the

order

banking

or other
law

and

enforcement
as

deemed

appropriate under the circumstances.

(signed) Barbara lowrey
Barbara R s Lowrey
Associate Secretary of the Board

6