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New data on the performance of nonbank subsidiaries of bank holding companies.


The Federal Reserve Board is empowered to permit bank holding companies to engage in those nonbank activities that are closely related to banking and that provide net public benefits. There are few studies of the performance of nonbank subsidiaries and those bank holding companies that own them because, until 1986, little financial information had been collected from nonbank subsidiaries. Using 1986 and 1987 data from a new reporting system, this study examines the extent of the involvement of bank holding companies in nonbank activities and the profitability and riskiness of the nonbank subsidiaries.

In 1987, net nonbank assets owned by the 298 firms reporting under the new system totaled $146.8 billion, representing 6.3 percent of the consolidated bank and nonbank assets of these firms. The ownership of these nonbank assets is highly concentrated. Among the reporting firms, the top five in terms of net nonbank assets held 59.2 percent of the net nonbank assets, and the top ten held 74.6 percent. The nation's largest banking organizations are also among the largest owners of nonbank assets. The fifty largest bank holding companies (in terms of consolidated bank and nonbank assets) held 90.6 percent of total net nonbank assets; twelve of these organizations held more than 10 percent of their total assets in nonbank subsidiaries.

For the most part, nonbank subsidiaries engage in the same lines of business as do banks. About 50 percent of aggregate nonbank assets are accounted for by the assets held in subsidiaries engaged principally in commercial finance, mortgage banking, consumer finance, and leasing. Securities brokerage subsidiaries, which engage in discount brokerage and some government securities underwriting, are also significant in terms of assets.

In both 1986 and 1987, profit rates of the nonbank subsidiaries were higher than the profit rates of affiliated banks and the consolidated bank holding companies. Across the different types of nonbank activities, profit rates vary widely. In general, subsidiaries engaged in insurance underwriting and the insurance agency business have relatively high returns on assets, whereas subsidiaries engaged in leasing and mortgage banking have relatively low returns.

Finally, nonbank subsidiaries are better capitalized than affiliated bank subsidiaries of bank holding companies. Some other commonly used risk measures suggest, however, that some of the nonbank subsidiaries are riskier than affiliated bank subsidiaries.
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Title Annotation:summary of staff study
Author:Savage, Donald
Publication:Federal Reserve Bulletin
Date:Mar 1, 1990
Previous Article:Monetary policy report to the Congress.
Next Article:Statements to Congress.

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