Final answer:
The Federal Reserve may indeed prevent the formation of a financial holding company if one of its insured depository subsidiaries is not well capitalized. This supervisory authority safeguards the financial system's stability and public confidence in banking institutions.
Step-by-step explanation:
The statement that the Federal Reserve may prevent the formation of a financial holding company if one of its insured depository institution subsidiaries is not well capitalized is true. The Federal Reserve has the authority to supervise financial institutions, including bank holding companies.
The Federal Reserve, along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), plays a critical role in ensuring the stability and soundness of the financial system. They help maintain public confidence in the banking system by overseeing these institutions, with the OCC supervising banks, and the Federal Reserve supervising the holding companies.
Financial holding companies are significant entities that own or control one or more banks and engage in other nonbanking financial activities. Bank holding companies are required to be well-capitalized and well-managed.
If a bank subsidiary is not well capitalized, it may pose a risk to the financial stability of the holding company and the broader financial system. Therefore, it is within the purview of the Federal Reserve to prevent such a financial holding company from forming, or to take other regulatory actions to mitigate the risks associated with undercapitalization.