We rationalize the organization of US banking groups into a holding company with subsidiaries – instead of branches or stand-alone units – subject to regulatory provisions of the ”source-of strength” type. We show that their value increases with debt diversity among affiliates and with complexity, as measured by the number of subsidiaries. Regulatory interventions that are aimed at ring fencing reduce (increase) the shareholder value, whenever the Governmental leniency to bailout is low (high). Branches become more valuable when there is no full commitment to internal rescue and Government bailout occurs with certainty.

We analyze theoretically banks’ choice of organizational structures in branches, subsidiaries or stand-alone banks, in the presence of public bailouts and default costs. These structures are characterized by different arrangements for internal rescue of affiliates against default. The cost of debt and leverage are endogenous. For moderate bailout probabilities, subsidiary structures, wherein the two entities provide mutual internal rescue under limited liability, have the highest group value, but also the highest risk taking as measured by leverage and expected loss. We explore the effect of constraints on leverage and policy implications. The conflict of interests between regulators, who minimize systemic risk, and banks, who maximize their own value, is mitigated when capital requirements are effective.

This paper discusses results and difficulties of comparing banks’ performance based on publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of important national banks. The objective is to determine whether Nordea’s unique strategy of functional integration across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the data lend only the weakest support to the hypothesis that the market viewed Nordea’s acquisitions as adding value.