With certain limitations, a bank may own real estate it acquires by foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in satisfaction of a debt previously contracted. Ownership of such property can create potential liability for the bank in a number of ways, though most commonly from personal injuries which occur on the property (another possibility with the potential to be very costly is environmental liability). While insurance can mitigate much of this risk, it has its limitations and a bank has options to be further protected.
One way to mitigate the risk is for a bank to own such property in an operating subsidiary wholly owned by the bank. Ownership of the property in an operating subsidiary would help limit the liability exposure to the assets of the subsidiary and protect the bank itself. Thus, the bank’s income and assets from other activities are insulated from the risks associated with property ownership. While common for large banks, many small banks do not have this level of protection in place, often because of the administrative burden associated with establishing a wholly owned subsidiary.
Under Ohio law, establishing an operating subsidiary requires a bank to submit a letter of notification to the superintendent of financial institutions in accordance with OAC 1301:1-3-10(B). The bank then must wait thirty (30) days for the superintendent to review the notification and, unless notified to the contrary, may establish the operating subsidiary for holding property. The operating subsidiary will be subject to the same laws and rules applicable to the bank.
With the large amount of property owned by banks in this current economic environment, many banks could face liability for personal injuries or other harms which occur related to the property. It may be in their best interest to act now and insulate the bank itself from those potential liabilities by establishing a wholly owned operating subsidiary, before it’s too late.