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A banking corporation is a legal entity that manages two or more subsidiary financial institutions. Its primary function is to set capital standards, evaluate mergers, and manage subsidiaries. Banking companies are heavily regulated to protect consumer funds and have been accused of playing a major role in the global recession.
A banking corporation is a financial institution that has formed a legal business entity to carry on banking and other financial activities. Banking companies are commonly referred to as bank holding companies. These companies are created to manage two or more subsidiary banking or financial institutions. In such cases, the banking company or holding company is not necessarily required to perform the transactional functions of a traditional bank.
The primary function of a banking corporation is to set capital standards, evaluate mergers, and manage any subsidiaries it may hold. Many banking corporations give their directors and officers the authority to add smaller banks to the corporation as subsidiary entities. One of the major benefits of a banking corporation is the ability to raise funds by distributing shares of the business entity to shareholders; however, a banking company that issues shares over a specific threshold may require additional compliance from government authorities. For example, banking companies in the United States with more than 300 shareholders require registration with the Securities and Exchange Commission. As part of its overall function, a banking corporation can provide liquidation and funding sources to subsidiary institutions during times of economic downturn.
Many banking firms are required to adhere to strict training and reporting requirements. They are typically heavily regulated to ensure the protection of consumer funds. For example, the Bank Holding Company Act, enacted by the US Congress in 1956, states that establishing a corporate bank must adhere to guidelines established and promulgated by the federal government through legislation.
Among its rules was the provision that a holding company or bank could not own banks in more than one state. Another provision of the original law stipulated that these companies were not permitted to conduct business or have an interest in any non-banking business. While many of these restrictions were rescinded with subsequent legislation, this practice has continued in Japan and many European countries.
Banking companies and holding companies have been accused of playing a major role in the global recession that began in late 2007. Many countries, including the United States, which previously prevented banks from incorporating non-bank entities into their banking companies and the holding companies started loosening those restrictions. These loosened restrictions allowed financial firms to create and sell unique financial products, called mortgage-backed securities, that relied on rising home values and the ability of borrowers to continue to repay adjustable-rate mortgages. In 2007, the world experienced a global recession that spread rapidly as the housing bubble burst and borrowers began foreclosing on mortgages that backed a large volume of financial instruments.
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