Federal Reserve Bank of New York Report: The Nonbank Footprint of Banks
Abstract
U.S. bank holding companies (BHCs) have developed a very significant nonbank footprint over the years, adding thousands of specialty lenders, brokers and dealers, asset management, and insurance subsidiaries to their organizations. These nonbank subsidiaries represent a sizeable share of aggregate BHC assets and a significant component of the entire U.S. nonbank industry. We argue that liquidity management synergies are an important driver of the coexistence of commercial banks and nonbank subsidiaries within BHCs. Using unique data on BHC organizational structure and financial reports, we show that in the unrestricted pre-crisis regulatory environment, commercial banks within BHCs with a large nonbank footprint hold fewer liquid assets and more loans on their balance sheet. We show that our results are driven by explicit and implicit intracompany funding arrangements between affiliated banks and nonbanks. Post-GFC banking regulation, like resolution planning and liquidity regulation, has disrupted liquidity synergies and has caused BHCs to scale back their nonbank footprint.
Introduction
What is a bank? And what are the activities that define the boundaries of a banking firm? In light of the rapid growth of nonbank financial institutions (NBFIs), a large literature has argued that bank-led financial intermediation, with banks defined based on their traditional deposit-taking and loan-making operations, is on the decline. We do not dispute this general observation. However, we argue that for the last few decades, deposit taking and loan making have not properly characterized the U.S. banking firm. We propose that absent regulatory restrictions, banks will naturally expand their boundaries to include NBFI subsidiaries, and that engaging in their complementary activities allows banks to exploit significant liquidity synergies.
We use a unique dataset of the organizational structure and financial reports of bank holding companies (BHCs), the dominant legal entity used to conduct the business of banking in the U.S., to present new evidence on the expansion of the boundaries of the banking firm over the last few decades. Since the 1980s, BHCs have been adding thousands of NBFI subsidiaries representing the full array of intermediation activities, including investment funds, securities dealers, insurers, and specialty lenders. These subsidiaries contribute meaningfully to the business model of BHCs. BHC-held nonbank subsidiaries constitute at least 20% of aggregate BHC assets and 11% of the aggregate NBFI industry in the United States. NBFI holdings are widespread across the banking industry, indicating that this has been an industry-wide phenomenon rather than an exceptional pattern confined to just a few “universal banks”.