What it means
Control normally means that the parent owns more than half of the voting shares, although the exact tests differ by country. The subsidiary has its own name, customers and accounts, and it answers to its own regulator as well as to the parent.
Groups use subsidiary banks for several reasons. A foreign bank entering a new country may be required to set up a locally licensed subsidiary, and a group may want to keep different types of banking, such as retail and investment banking, in separate legal entities.
A subsidiary is different from a branch. A branch is part of the parent bank and shares its legal identity, while a subsidiary is a company in its own right with its own capital, so losses and obligations are held within that entity in the first instance.
Regulators usually require a subsidiary bank to meet capital and liquidity standards by itself, and they limit how much it can lend to or take on from its parent and sister companies. These limits are designed to stop a weak parent from draining a healthy bank.
Funding and support are worth understanding. A parent can supply capital and liquidity to a subsidiary, and that support is a major reason depositors trust it, yet the law and the regulator may limit how much the parent can take back out as dividends.
During stress, the regulator may require the parent to inject more capital before it will allow the subsidiary to continue operating normally. In the parent's financial statements, a controlled subsidiary is consolidated, meaning its assets, liabilities, income and expenses are combined with the group's.
If the parent owns less than 100%, the outside owners' share is shown separately as a non-controlling interest.
In practice
Real-world examples.
Example
A European bank buys a controlling stake in a local bank in Asia. The local bank continues to operate under its own licence and name, but it reports to the parent group. Customers notice little change, while the group gains access to a new market.
Example
A US bank holding company owns three subsidiary banks in different states. Each has its own board and capital, and the holding company manages them as a group.
Example
A technology group receives a banking licence for a new digital bank and owns it as a subsidiary. The bank must meet its own capital requirements, separate from the rest of the group. If the technology business has a bad year, the bank's capital and customer deposits remain separate from it.
Formula
Calculation
The parent's share of a subsidiary's profit follows its ownership:
Parent's share = Subsidiary net income x Ownership %
Non-controlling share = Subsidiary net income x (1 - Ownership %)
A holding company owns 80% of a subsidiary bank that earns $10,000,000 of net income. The parent's share is $10,000,000 x 0.80 = $8,000,000 and the non-controlling share is $10,000,000 x 0.20 = $2,000,000. In the group accounts, 100% of the $10,000,000 is included, with $2,000,000 attributed to the outside owners.Case study
Seen in the real world.
Meridian Banking Group is an illustrative, fictional company that bought 70% of a small regional bank to enter a new market. The regional bank kept its name, branches and management, but it was brought into the group's risk and reporting framework. Meridian paid for the stake out of its own capital and did not borrow to fund the purchase.
In the first year, the subsidiary earned $6,000,000 of net income. The group's share was $4,200,000 and the remaining $1,800,000 belonged to the minority shareholders, which the group disclosed as a non-controlling interest.
In this illustrative story, the subsidiary later suffered losses on a loan portfolio and the regulator required it to raise more capital. The parent put in new money, but the subsidiary's structure meant that the loss stayed within that bank and did not spread automatically across the whole group.
Watch out
Common mistakes.
- Treating a subsidiary bank as a branch, when it is a separate legal entity with its own capital.
- Assuming a parent will always cover losses, when the legal duty depends on the law and the regulator's requirements.
- Forgetting that the parent's reported results include 100% of the subsidiary even if the parent owns only part of it.
Questions
People also ask.
What is the difference between a subsidiary and an affiliate?
A subsidiary is controlled by the parent, usually through majority ownership, while an affiliate is a looser relationship where the parent has influence but not control.
Why do foreign banks use subsidiaries?
Many countries want local licensing, local capital and local oversight, which a subsidiary provides.
Are customer deposits in a subsidiary protected by the parent's country?
Usually deposit protection follows the country where the subsidiary is licensed, so the rules of that country apply, and customers should check which scheme covers them.
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