As far as bank bond investors are concerned, the whole is less than the sum of its parts.
Rating agencies and investors think most bank holding companies are weaker than their banks. Investors therefore demand higher yields on holding company debt than on bank debt.
Whether the difference is justified has become a subject of debate among fixed-income analysts.
The debate reveals as much about analysts' perceptions of a worst-case scenario for the banking industry as about their opinions of holding companies and their banks.
Ethan M. Heisler, an analyst at Salomon Brothers Inc., says the typical 5-basis-point difference between the two classes of debt is unwarranted, since holding companies are benefiting from a stream of megamergers and growth in such nonbank businesses as captive finance companies.
Allerton G. "Tony" Smith of Donaldson, Lufkin & Jenrette disagrees, citing a host of factors, including the lower position of holding company debt holders in the event of liquidation.
"All this boils down to assigning a price for risk," said Mr. Smith. "My view is that the differential risks should be priced differently, since I perceive more risk at the holding company than at the bank level."
Mr. Smith said that event risk means greater exposure for holding company debt holders. "There is no constraint on a bank holding company ballooning up its leverage if it chooses to finance an acquisition with cash and debt. Investors just don't have the covenant protection," he said.
Additionally, creditors at holding companies would be treated substantially differently in the recoverability of assets and the timetable with which payment comes after a liquidation, he said.
"If the banking industry is in trouble, it won't make a heck of a lot of difference if you're at the bank or holding company level," Mr. Heisler countered.
In any case, liquidations do not look imminent in the industry, he said.
"I don't see a meltdown scenario," he said. "We're on a much different footing with the bank industry today, even though we haven't abolished" business and credit cycles.
While Mr. Heisler recognizes that parent company and bank subsidiaries carry different ratings because of the potential for regulators to require holding companies to support banks, he believes that bank holding companies have reached sustainably high capital levels.
As a result, the parent companies are not necessarily 5 basis points riskier, and indeed, in some instances, should trade close to the same level as their affiliate banks.
"Parent companies are not mere shells," said Mr. Heisler. "They have a tremendous amount of strength, with extremely conservative balance sheets and liquidity management. They are not completely dependent on the earnings of the bank regulated subsidiaries."
Mr. Heisler said that the argument that parent companies should trade at comparable levels applies mainly to banks with strong single-A debt ratings, and in particular, to holding companies that are supported by several banks.
BankAmerica, Banc One, Keycorp, First Interstate, and Marshall and Illsley are all companies for which investors are probably better off holding the parent company debt than the bank debt, said Mr. Heisler. In the event that dividends were suspended from one bank, the others could continue to support the parent's revenue needs, he said.