What Is a Financial Holding Company (FHC)?

A financial holding company is a type of bank holding company that offers a range of non-banking financial services.

Key Takeaways

  • A financial holding company (FHC) is a bank holding company that can offer non-banking financial services, such as insurance underwriting and investment advisory services.
  • The Federal Reserve oversees all FHCs.
  • Bank holding companies can become an FHC by meeting capital and management standards.
  • A nonbank company generating 85% of gross income from financial services can become an FHC.

Understanding a Financial Holding Company (FHC)

Financial holding companies (FHC) were created by the 1999 Gramm-Leach-Bliley Act, which amended the 1956 Bank Holding Company Act to allow companies that control one or more banks—bank holding companies—to engage in non-banking financial activities if they register as an FHC. These activities, which are not permissible for ordinary bank holding companies, include:

  • Insurance underwriting
  • Securities dealing
  • Merchant banking
  • Securities underwriting
  • Investment advisory services

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 businesses within 10 years. For a bank holding company to declare itself an FHC, it must meet certain capital and management standards.

Both bank and nonbank holding companies can become FHCs if they meet certain criteria.

Example of a Financial Holding Company

FHCs came about shortly after the 1998 merger between Citicorp and the insurance company Travelers Group. As a bank holding company, Citicorp was barred from selling insurance through a subsidiary. The chair of Travellers told the New York Times at the time, "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 Bill Clinton signed the Gramm-Leach-Bliley Act into law the following year. Goldman Sachs became an FHC in August 2009 and other major FHCs include Bank of America and Fifth Third Bancorp.