Definition of financial holding company (FHC)


What is a financial holding company (FHC)?

A financial holding company (FHC) is a type of bank holding company (BHC) that provides a range of non-bank financial services. BHCs can engage in non-bank financial activities if they register as an FHC. These activities, which are not permitted for ordinary bank holding companies, include underwriting insurance, securities trading, merchant banking, underwriting of initial public offers (IPOs) and investment advisory services.

Key points to remember

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

Understanding a Financial Holding Company (FHC)

The Bank Holding Company Act of 1956 redefined a bank holding company (BHC) as any company that held an interest in 25% or more of the shares of two or more banks (where ownership of an interest includes outright ownership , in addition to the control or the ability to vote on the shares). Most banks in the United States are owned by Bank Holding Companies (BHC).

Then, in 1999, the Gramm-Leach-Bliley Act of 1999 (GLBA) repealed the Glass-Steagall Act of 1933, which stipulated that commercial banks were not allowed to offer financial services, such as investments and insurance-related services as part of normal operations.

Many experts believe that the Glass-Steagall repeal helped spark the 2008 financial crisis. After the financial crisis, the Volcker Rule was passed and restored some aspects of Glass-Steagall.

At that time, BHCs were allowed to self-identify as (FHCs), and this status allowed them to engage in financial activities, including underwriting and trading of securities, insurance, underwriting and business activities. of investment banking.

Financial holding company (FHC) requirements

The Federal Reserve Board is responsible for overseeing all bank holding companies, including FHCs. Any non-bank business that derives 85% of its gross revenue from financial services can choose to become an FHC but must exit all non-financial activities within 10 years. In order for a bank holding company to qualify as FHC, it must meet certain capital and management standards.


The percentage of commercial banks in the United States that are part of a BHC structure.

For a BHC to be eligible for FHC status, all of 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 financial holding companies

The FHCs came into being shortly after the 1998 merger between Citicorp and the insurance company Travelers Group. As a bank holding company, Citicorp was not permitted to sell insurance through a subsidiary. The chairman 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, and Bill Clinton enacted the Gramm-Leach-Bliley Act 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 (FHC)?

The main reason for becoming a financial holding company is to be able to offer 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 develop its customer base and profits.

What can a financial holding company (FHC) do that a bank holding company cannot?

Financial holding companies can underwrite insurance, trade in securities, engage in merchant banking, underwrite initial public offerings (IPOs) and provide investment advisory services. Traditional banks are not allowed to provide 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 should not carry out additional FHC activities or acquire a company that carries out such activities, directly or indirectly. These prohibitions must remain in place until the HCF receives a satisfactory rating or better.

The bottom line

Financial Holding Companies (FHCs) are allowed to perform activities that traditional banks are not allowed to perform, such as underwriting and insurance. This allows a bank to expand its offerings, attract more customers and make more profit. This is particularly useful if a customer is already doing traditional banking business with a bank, then the bank can offer that customer more services, expanding its business.


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