Related Organizations

Diversification and Control

To ensure orderly expansion and diversification, there must be adequate coordination among the banking and nonbanking subsidiaries within the parent holding company. Sound internal controls must be established to ensure that geographically dispersed or organizationally separated operations follow stated policies and procedures. The coordination of policies and internal controls are particularly important in the lending area. A major benefit to the individual bank in belonging to a multibank holding company is that it can better serve its customers by syndicating loans that would exceed its legal limit.

The ease with which loans are syndicated in a multibank holding company can, absent the proper policies and controls, expose the entire corporate family to two hazards. The first relates to management: loans may be approved that are beyond the individual bank’s lending limit and beyond the management expertise of any of the participants. The second relates to credit concentration: for multibank holding companies actively involved in the operations of affiliate banks, the absence of good communication may result in an undue concentration of credit. The problems of credit concentration are often magnified when nonbank affiliates, such as mortgage or leasing companies, are involved. A concentration of credit may develop when such nonbanking affiliates are extending credit to the same customers or industries as their affiliated banks.

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