A financial holding company, or FHC, manages companies that do not necessarily deal directly with banking activities but with other financial services instead. It is important for anyone who owns a business or works in any form of financial services to fully understand what a financial holding company is and what it takes to qualify as one.

Financial Holding Company (FHC)

An FHC is an institution that is involved in banking activities that provide customers a large range of different financial services. For instance, an FHC offers customers the opportunity to buy insurance or invest in securities.

The Bank Holding Company Act of 1956 disallowed the affiliation between insurance companies and banks. These restrictions were taken away by the Gramm-Leach-Bliley Act of 1999. The FHC was created by this act.

The Federal Reserve Board is in charge of supervising the activities and financial condition of financial holding companies. A bank holding company will qualify as an FHC once its banking subsidiaries are well-managed and well-capitalized. A company may file a certification with the Federal Reserve Board. The business will then qualify as a financial holding and may choose to become a Financial Holding Company.

Non-bank commercial companies that engage in almost all financial services that also earn 85 percent and higher of their revenue from financial services can opt to become an FHC. However, a company has to divest itself of any and all non-financial types of businesses in a 10-year time period.

The Bank Holding Company Act of 1956 defines a bank holding company as a company that has its controlling interest over banks. A federal holding company may also be a bank holding company, also known as a BHC, if the following is met:

·       Any depository institution owned by a bank holding company has to remain well-capitalized.

·       Any depository institution owned by a bank holding company has to remain well-managed.

·       The BHC has to make an election to become an FHC.

Provision of 12 CFR 225.81- Financial Holding Company

In addition to the regular requirements, there are additional requirements for foreign banks. Foreign banks that have branches in the United States are bank holding companies. If they own a branch, agency, or are in control of a commercial lending corporation in the U.S., they have to comply with all provisions in this section. Once they become a federal holding company, foreign banks will be subjected to provisions §§ 225.83, 225.84, 225.93, and 225.94.

Bank holding companies that own foreign banks that operate an agency or branches, or one that owns or has control of a commercial lending company in the U.S. has to comply with this provision along with § 225.82, and §§ 225.90 through 225.92 to be an FHC. Once it becomes a financial holding company, a BHC fitting this description is also subjected to provisions of §§ 225.83, 225.84, 225.93, and 225.94.

Financial Holding Company (FHC): Background

FHCs were started in 1999 by the Gramm-Leach-Bliley Act. This served as an amendment to the 1956 Bank Holding Company Act that allows companies that control bank holding companies to engage in other financial activities when registered as an FHC.

These activities, which aren’t allowed in normal BHCs, include securities dealings, insurance underwriting, securities underwriting, merchant banking, and investment advisory services.

The Federal Reserve Board supervises all BHCs, including federal holding companies.  FHCs began not long after the 1998 merger between Citicorp and Travelers Group, which is an insurance company. Citicorp was not allowed to sell insurance via a subsidiary. The Fed allowed a waiver that allowed the merger to happen, and Bill Clinton, the President of the United States at the time, signed the Gramm-Leach-Bliley Act into law the next year.

In 2009, Goldman Sachs Group became a financial holding company after a major financial meltdown. Other major FHC companies include Fifth Third Bancorp and Bank of America Corp.

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