Related Organizations

Maintaining Independence

The board’s duty of loyalty takes on added significance when a bank is a subsidiary of a diversified holding company that owns numerous nonbank companies as well as other banks. The board and management of a bank that is part of a holding company may have a different operating environment than an independent bank does. When there are multiple related companies with different business purposes, a bank’s board must ensure that the activities of the other related companies do not conflict with the bank’s best interests.

The bank’s board should not relinquish control of bank activities or functions that are outsourced to, or performed by, the BHC or other related organizations. The board’s corporate governance practices should require a careful review of holding company policies and procedures that affect the bank, ensuring that they adequately serve the bank. Strong board oversight is particularly important when bank functions, such as risk management systems, are centralized within a diversified holding company or are outsourced to another related organization.

The bank’s board should regularly monitor the impact of holding company policies that affect the bank. If concerned that the holding company is engaging in practices that may harm the bank or are otherwise inappropriate, the bank’s board should notify the holding company and obtain modifications. If the holding company board does not address the bank’s concerns, bank directors should dissent on the record and should consider action to protect the bank. If necessary, it should hire an independent legal counsel or accountant. The board also may communicate its concerns to the OCC.

Unsafe and unsound activities of nonbank subsidiaries of the bank’s holding company may adversely affect the bank’s condition and reputation. A bank’s board and management must be appropriately informed of the condition and activities of all holding company subsidiaries.

Previous: Policies and Control Systems Next: Other Issues