A bank corporation is a financial institutional that has formed a legal corporate business entity to carrying on banking and other financially related activities. Bank corporations are commonly referred to as bank holding companies. These companies are set up to manage two or more subsidiary banking or financial institutions. In such instances, the bank corporation or holding company is not necessarily required to perform the transactional functions of a traditional bank.
The primary function of a bank corporation is to set capital standards, evaluate mergers, and manage any subsidiaries that it may hold. Many bank corporations provide their directors and officers with the authority to add smaller banks to the corporation as subsidiary entities. One of the main advantages of a bank corporation is the ability to raise funding by distributing shares of the corporate entity to shareholders; however, a bank corporation that issues shares beyond a specific threshold may require additional compliance with governmental authorities. For example, bank corporations in the United States with more than 300 shareholders require registration with the Securities and Exchange Commission. As part of its overall function, a bank corporation can provide liquidation and funding sources to subsidiary institutions during periods of economic crisis.
Many bank corporations are required to adhere to strict formation and reporting requirements. They are typically regulated heavily to ensure that consumer funds are protected. For example, the Bank Holding Company Act, enacted into law by the United States Congress in 1956, holds that the formation of a corporate bank must adhere to guidelines set forth and promulgated by the federal government through legislation.
Among its rules was the provision that a holding company or bank corporation could not own banks in more than one state. Another clause of the original law stipulated that these corporations were not allowed to conduct business or have an interest in any non-banking business. Although many of these restrictions were negated with subsequent legislation, this practice continued in Japan and in many European countries.
Bank corporations and holding companies have been blamed for playing a major role in the worldwide recession that began in late 2007. Many countries, including the United States, that had previously prevented banks from incorporating non-banking entities into their bank corporations and holding companies began relaxing those restrictions. These relaxed restrictions allowed financial firms to create and sell unique financial products, called mortgage-backed securities, which relied upon increasing home values and the ability of borrowers to continue to pay back variable-rate mortgages. In 2007, the world experienced a global recession that spread quickly when the housing bubble burst and borrowers began foreclosing on mortgages that backed a large volume of financial instruments.