Financial Holding Companies: Definition

Financial holding companies, bank holding companies, securities holding companies, full-service banks, and other similar terms are often regarded as equivalent. But a clear understanding and distinction of these terms will help define more clearly the future management model for Chinese securities firms.

Generally, investment banking management models can be divided into the following three models:

1. Independent investment banks: In the independent investment bank model, an investment bank not affiliated to any financial holding company. It carries out investment banking activities on its own for the purpose of better decision making and efficient operation. Morgan Stanley, Goldman Sachs, and Merrill Lynch before the financial crisis are typical examples.[1]

2. Affiliates to financial holding companies: In the affiliate model, an investment bank is an affiliate to a financial holding company and does business in a relatively independent manner in the capital market.

3. Subsidiaries of bank holding companies: In the subsidiary model (crossover in all activities), an investment bank has no independent legal capacity and is merely a business division of a bank holding company (full-service bank). Typical examples include the Deutsche Bank and the Union Bank of Switzerland in Continental Europe.

  • [1] In the independent business model, a securities firm (investment bank) conducts business on its own and is not affiliated to any financial holding company. As per ownership and liability, this model can be further divided into partnership and corporate models. Investment banks, the American ones in particular, were all family-controlled partnerships. Generally, large investment banks have experienced the conversion from partnerships into corporations. Today, only a small number of investment banks remain as partnerships, while most have been acquired by or merged into financial holding companies or have become public companies. But even if an investment bank has completed the conversion from a partnership into a public company, such as Goldman Sachs becoming a public company in 1999 and converting into a bank holding company after the financial crisis. We still view it to be in an independent business model because such conversion is merely an internal ownership arrangement and does not result in any change in business and management models.
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