What Is a Financial Holding Company (FHC)?
The term financial holding company (FHC) refers to 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, which are not permissible for ordinary bank holding companies include insurance underwriting, securities dealing, merchant banking, underwriting initial public offerings (IPOs), and investment advisory services.
- A financial holding company is a bank holding company that can offer non-banking financial services.
- Services that FHCs can offer include insurance underwriting, securities dealing, merchant banking, securities underwriting, and investment advisory services.
- The Federal Reserve oversees all FHCs.
- Bank holding companies can become FHCs 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)
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, in addition to control of or the ability to vote on shares). Most banks in the U.S. are owned by bank holding companies.
Then, in 1999, the Gramm-Leach-Bliley Act (GLBA) of 1999 repealed the Glass-Steagall Act of 1933, which stated that commercial banks were not allowed to offer financial services—like investments and insurance-related services—as part of normal operations.
At this time, BHCs were allowed to declare themselves as FHCs, and this status allowed them to engage in financial activities, including securities underwriting and dealing, insurance, underwriting activities, and merchant banking activities.
Many experts believe that the repeal of Glass-Steagall helped usher in the financial crisis of 2008. After the financial crisis, the Volcker Rule was passed and restored some of the aspects of Glass-Steagall.
|10 Largest Financial Holding Companies|
|JPMorgan Chase||$3.77 trillion|
|Bank of America||$3.07 trillion|
|Wells Fargo||$1.88 trillion|
|Goldman Sachs||$1.55 trillion|
|Morgan Stanley||$1.16 trillion|
|U.S. Bancorp||$6.01 billion|
|PNC Financial Services||$5.59 billion|
|Truist Financial||$5.48 billion|
|Capital One||$4.44 billion|
Source: Federal Financial Institutions Examination Council
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.
For a BHC to be eligible to be an FHC, all of its depository institution subsidiaries need to be well-capitalized and well-managed. They must also all have satisfactory or better ratings under the Community Reinvestment Act.
The percentage of commercial banks in the U.S. that are part of a BHC structure.
History of FHCs
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 Travelers 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 announced in 2008 that it would become an FHC.
What Is the Main Reason for Becoming a Financial Holding Company?
The main reason to become a financial holding company is to be able to engage in more service offerings to clients. Traditional banks can only provide a limited number of services. By becoming a financial holding company, a bank can offer many more services and grow its client base and profits.
What Can a Financial Holding Company Do That a Bank Holding Company Can't?
Financial holding companies can underwrite insurance, deal in securities, engage in merchant banking, underwrite initial public offerings, and provide investment advisory services. Traditional banks are not allowed to perform these services.
What Happens If the Fed Gives a Financial Holding Company an Unsatisfactory Rating?
If a financial holding company receives an unsatisfactory rating it must not perform any additional FHC activities or acquire a company that performs such activities, either directly or indirectly. These prohibitions must remain in place until the FHC receives a satisfactory rating or better.
The Bottom Line
Financial holding companies are allowed to engage in businesses that traditional banks are not allowed to, such as underwriting and insurance. This allows a bank to expand its offerings, draw in more customers, and make more profits. It is especially useful if a client is already doing traditional banking business with a bank, the bank can then offer this client more services, growing its business.
U.S. Federal Reserve System. "Bank Holding Companies and Financial Holding Companies."
Federal Reserve History. "Bank Holding Company Act of 1956."
Ballotpedia. "Gramm-Leach-Bliley Act."
Federal Reserve. "Report to Congress on Financial Holding Companies Under the Gramm-Leach-Bliley Act," Page 32.
U.S. Government Publishing Office: 106th Congress, 1st Session, House of Representatives, Report 106-434. "GRAMM-LEACH-BLILEY ACT."
The New York Times. "Citicorp and Travelers Plan to Merge in Record $70 Billion Deal: A New No. 1: Financial Giants Unite."
Goldman Sachs. "Goldman Sachs Announces It Will Become a Bank Holding Company."
Cornell Law. "12 CFR 225.84 - What Are the Consequences of Failing to Maintain a Satisfactory or Better Rating Under the Community Reinvestment Act at All Insured Depository Institution Subsidiaries?"