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 of financial and managerial strength to their subsidiary
banks. It 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 funds
to its subsidiary banks during periods 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. As the Supreme Court recognized
in the 1978
First Lincolnwood decision, Congress has expressly
endorsed the Board’s long-standing view that a holding company must
serve as a “source of strength to subsidiary financial institutions.”
1 In addition to frequent pronouncements over the years and the
1978 Supreme Court decision, this principle has been incorporated
explicitly in Regulation Y since 1983. In particular, section
225.4(a)(1)
of Regulation Y provides
that—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 fiduciary responsibilities of depository institutions
as custodians of depositors’ funds and their strategic role within
our economy as operators of the payments system and impartial providers
of credit. 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 banks.
An important determinant of a bank’s financial strength
is the adequacy of its capital base. Capital provides a buffer for
individual banking organizations to absorb losses in times of financial
strain, promotes the safety of depositors’ 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 institutions.
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 Board’s 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 company’s 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 Y or both. Where necessary, the Board
is prepared to take supervisory action to require such 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 establish new principles
of supervision and regulation; rather, as already noted, it builds
on public policy considerations as reflected in banking laws and regulations
and long-standing Federal Reserve supervisory policies and practices.
A bank holding company’s 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, such a failure will generally
result in the issuance of a cease-and-desist order or other enforcement
action as authorized under banking law and as deemed appropriate under
the circumstances. STATEMENT of April 24, 1987.
