James Stevens, partner and co-leader of Troutman Pepper Locke’s Financial Services Industry Group, was quoted in a recent article by Emily McCormick, “When the Holding Company Isn’t a Source of Strength.” The article examines the tensions that can arise between bank holding companies and their subsidiary banks, and what directors should do when those interests diverge.

The article explores how the source of strength doctrine, codified under Federal Reserve Regulation Y, obligates bank holding companies to support the safety and soundness of their subsidiary banks, while holding company directors simultaneously owe fiduciary duties to shareholders. As Stevens notes, that dual obligation can put directors in a genuinely difficult position: “Even at a bank without a holding company, when you’re a bank director, your fiduciary duties are very difficult.”

McCormick’s piece draws on real-world examples to illustrate how holding company stress can impair a bank’s ability to grow, execute its strategy, and ultimately serve its depositors and regulators. Stevens addresses practical nuances as well, including the treatment of industrial loan company parent companies, which are not technically subject to Regulation Y but contractually assume equivalent obligations through FDIC agreements.

On how regulators communicate expectations to directors, Stevens explains: “The FDIC cannot tell the bank holding company directors to go out and raise capital, but they can remind them of their obligation and the source of strength doctrine.” And when directors are forced to make hard calls, his advice is grounded in process: “Be very informed, thoughtful, act reasonably, have a rationale for what you’re doing, document it, have a lot of process around it.”

Click here to read the full article.