Definition Of Subsidiary Bank:
A subsidiary bank is a type of financial institution that operates as a separate legal entity in a host country but is wholly or majority-owned by a parent bank or financial institution from another country. Unlike a branch of a foreign bank, a subsidiary bank is incorporated in the host country and is subject to the regulations and laws of that country. This structure allows the subsidiary bank to offer a range of banking services, including accepting deposits and providing loans, while also benefiting from the support and resources of its parent institution.\
Explanation
While subsidiary banks have many advantages, they also come with their set of challenges. For instance, the amount of commercial loans that the bank can offer is often limited compared to a Community Bank or a trust company. However, they excel in underwriting securities, which can be a significant source of revenue.
Characteristics of a Subsidiary Bank
A subsidiary bank, often referred to as a bank subsidiary, is a local financial institution branch based in a different country. Unlike domestic banks, it is incorporated in the host country. This means it’s only obliged to follow the host country’s laws, making it a distinct entity in the banking industry. This unique organizational structure allows large parent companies, or company affiliates, to avoid unfavorable regulations in their home country, showcasing the bank’s source of strength.
Role and Importance of Subsidiary Banks
Subsidiary banks play a pivotal role in the financial service sector. They act as a bridge between the parent company and the host country, offering a range of services from commercial banking to acting as financial advisors. Their board of directors and executive officers work closely with corporate clients, ensuring that the bank operates in line with the host country’s regulations. Furthermore, subsidiary banks can engage in joint ventures, further expanding their reach and influence.
Subsidiary Bank vs. Branch of a Foreign Bank
The choice between establishing a subsidiary bank and opening a foreign bank branch depends on the parent bank’s strategy. Suppose the primary objective is offering loans, especially commercial ones, in the host country. In that case, the foreign branch bank model, with its expansive banking subsidiary bank level, is the logical choice. On the other hand, if the bank aims to deal in buying and selling securities, then establishing a subsidiary bank, with its dedicated Financial Statements and board, becomes more suitable.
