But, holding companies also own nonsubsidized entities that have no direct access to the safety net. Accordingly, both bank holding companies and their nonbank subsidiaries have a higher cost of capital than banks. This is clear in the debt ratings of bank subsidiaries of bank holding companies, which are virtually always higher than those of their parent holding companies.
Moreover, existing law and regulation under Sections 23A and 23B of the Federal Reserve Act require that any credit extended by a bank to its parent or affiliate not only be totally collateralized and subject to quantitative limits, but also be extended at arms-length and at market rates, making a direct transfer of the safety net subsidy difficult.