Karen Petrou: What Happens When a Bank’s Parent Goes Up in Smoke

2023-08-28T12:31:01-04:00August 28th, 2023|The Vault|

I recently bemoaned the Fed’s failure before and after SVB’s collapse to demand source-of- strength backstops from the parent holding company. That these would have materially reduced the FDIC’s cost and thus that of the large banks picking up this tab is still more obvious by the fact that it took the Justice Department to bar big pay-outs to the parent company’s executives. Clearly, there’s still money to be made, just not for anyone else. However, the source-of-strength question takes on still more immediate importance in light of the highly worrisome case of Hawaii Electric. It owns American Savings Bank (ASB), a $9.6 billion insured depository. Some parent-company investors somehow think ASB will bail out the beleaguered Maui electric utility, redefining who is the source of strength. ASB can’t, but that doesn’t mean the insured depository is safe and sound. Without downstreamed parent-company cash in hand to protect it from the utility’s travails, the insured depository and thus the FDIC are sure to suffer.

Yet another formidable post on the Bank Reg Blog lays out the history of how it came to be that an public utility owns an insured depository. Barriers between banking and commerce that Congress didn’t close for BHCs in 1956 were shuttered in 1970 and 1987, leaving only industrial loan companies and unitary thrift holding companies (i.e., parent companies such as Hawaii Electric) as the only ones allowed to own insured depositories. Unitary thrifts were prospectively barred in 1999 and several large grandfathered ones did themselves …