What Is a Financial Holding Company (FHC)?

A financial holding company (FHC) is a type of bank holding company (BHC) that offers a range of non-banking financial services. BHCs can engage in non-banking financial activities if they register as FHCs. These activities aren't permissible for ordinary bank holding companies. They include insurance underwriting, securities dealing, merchant banking, underwriting 澳洲幸运5官方开奖结果体彩网:initial public offerings (IPOs), and investment advisory services.

Understanding a Financial Holding Company (FHC)

The Bank Holding Company Act of 1956 redefined a bank holding company as any company that held a stake in 25% or more of the shares of two or more banks where holding a stake includes outright ownership as well as control of or the ability to vote on shares. Most banks in the U.S. are owned by bank 澳洲幸运5官方开奖结果体彩网:holding companies.

The 澳洲幸运5官方开奖结果体彩网:Gramm-Leach-B♌lꦡiley Act (GLBA) of 1999 then repealed the Glass-Steagall Act of 1933 in 1999. The 澳洲幸运5官方开奖结果体彩网:Glass-Steagall Act stated that commercial banks weren't allowed to offer financial services such as investments and insurance-related services as part of normal operations.✱

BHCs were allowed to declare themselves as FHCs at this time and this status allowed them to engage in financial activities including securities underwriting and dealing, insurance, underwriting activities, and merchant banking activities.

Source: Federal Financial Institutions Examination Council

FHC Requirements

The Federal Reserve Board is responsible for supervising all bank holding companies including FHCs. Any non-bank company that earns 85% of its gross income from financial services may elect to become an FHC but must divest itself of all nonfinancial buꦍsinesses within 10 years.

A bank holding company must meet certain capital and management standards to declare itself an FHC. All its depository institution subsidiaries must be well-capitalized and well-managed. They must also all have satisfactory or better ratings under the Community Reinvestment Act.

History of FHCs

FHCs came about shortly after the 1998 merger between Citicorp and the Travelers Group insurance company. Citicorp was barred from selling insurance through a subsidiary because it was a bank holding company. The chair of Travelers told the New York Times, "We have had enough discussions to believe this will not be a problem."

The Fed granted a waiver allowing the merger to go through and President Bill Clinton signed the Gramm-Leach-Bliley Act into law the following year. Goldman Sachs announced in 2008 that it would become an FHC.

The Bottom Line

Financial holding companies are permitted to engage in businesses that traditional banks aren't allowed to such as underwriting and insurance. This allows a bank to expand its offerings, draw in more customers, and make additional profits. It's especially useful if a client is already doing traditional banking business with a bank because the bank can then offer this client more services, growing its business.