A subsidiary bank is a banking operation that is incorporated in the country where it operates, but is owned by a parent bank that is incorporated in a different nation. This particular banking model is useful, in that the arrangement only requires that the subsidiary operate according to the regulations that apply to banking in the host country. Subsidiary banks are not bound by banking regulations that apply to the parent bank in the nation or nations where the parent is incorporated.
There are some important differences between a subsidiary bank and a foreign branch bank. With the latter, the bank is bound by the regulations that apply to the parent, as well as the regulations that are in effect in the country where the bank actually operates. In addition, a foreign branch bank can also issue considerably more loans than a subsidiary bank, since the assets held by the parent influence the amount of loans. In contrast, a subsidiary bank does have the advantage of being able to underwrite securities, a function that is not necessarily possible with a foreign branch bank.
For this reason, banking institutions look closely at what they wish to accomplish in terms of establishing a presence in another country. If the goal is to be able to offer loans in the host country, then the foreign branch bank model will be the logical choice, since this approach allows the bank to offer more in the way of loans and loan options. Should the main reason for establishing a banking presence in the host country relate to buying and selling securities, then structuring the new entity as a subsidiary bank would provide the framework for the project. For example, if a parent bank based in the United States wanted to open an operation in the United Kingdom for the purpose of offering security transactions to consumers, the subsidiary bank platform would be the best option.
In terms of charges for the services offered by the subsidiary bank, these must be in harmony with any regulations that apply to all banking establishments that operate in the host country. This allows the banks to be competitive with domestic financial institutions as well as other foreign owned banks that have a presence in the nation. When evaluating the services offered by a subsidiary bank, it is important to compare those rates with those available from other institutions, as well as look closely at the terms and conditions that apply to customer accounts.
