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 offers a scope of non-banking financial services. BHCs can take part in non-banking financial activities on the off chance that they register as a FHC. These activities, which are not permissible for ordinary bank holding companies, incorporate insurance underwriting, securities dealing, merchant banking, underwriting [initial public offerings](/initial public offering) (IPOs), and investment advisory services.
Understanding a Financial Holding Company (FHC)
The Bank Holding Company Act of 1956 re-imagined a bank holding company (BHC) as any company that held a stake in 25% or a greater amount of the shares of at least two banks (where holding a stake incorporates outright ownership, notwithstanding control of or the ability to vote on shares). Most banks in the U.S. are owned by bank holding companies (BHCs).
Then, at that point, in 1999, the Gramm-Leach-Bliley Act of 1999 (GLBA) canceled the Glass-Steagall Act of 1933, which stated that commercial banks were not permitted to offer financial services — like investments and insurance-related services — as part of normal operations.
Numerous specialists accept that the annulment of Glass-Steagall helped introduce the financial crisis of 2008. After the financial crisis, the Volcker Rule was passed and reestablished a portion of the parts of Glass-Steagall.
Right now, BHCs were permitted to declare themselves as (FHCs), and this status permitted them to participate in financial activities, including securities underwriting and dealing, insurance, underwriting activities, and merchant banking activities.
Financial Holding Company (FHC) Requirements
The Federal Reserve Board is responsible for administering all bank holding companies, including FHCs. Any non-bank company that acquires 85% of its gross income from financial services might choose to turn into a FHC however must strip itself of all nonfinancial businesses in 10 years or less. For a bank holding company to declare itself a FHC, it must meet certain capital and management standards.
84%
The percentage of commercial banks in the U.S. that are part of a BHC structure.
For a BHC to be eligible to be a FHC, its depository institution auxiliaries should be all very much capitalized and all around made due. They must likewise all have satisfactory or better ratings under the Community Reinvestment Act.
History of Financial Holding Companies
FHCs came about soon after the 1998 merger among Citicorp and the insurance company Travelers Group. As a bank holding company, Citicorp was banished from selling insurance through a subsidiary. The chair of Travelers told the New York Times at that point, "We have had an adequate number of conversations to trust this won't be a problem."
The Fed conceded a waiver permitting the merger to go through, and Bill Clinton marked the Gramm-Leach-Bliley Act into law the next year. Goldman Sachs announced in 2008 that it would turn into a FHC.
The Bottom Line
Financial holding companies (FHCs) are permitted to participate in businesses that traditional banks are not permitted to, for example, underwriting and insurance. This permits a bank to extend its offerings, draw in additional customers, and create more gains. It is particularly helpful on the off chance that a client is now doing traditional banking business with a bank, the bank can then offer this client more services, developing its business.
Features
- Bank holding companies can become FHCs by meeting capital and management standards.
- The Federal Reserve directs all FHCs.
- Services that FHCs can offer incorporate insurance underwriting, securities dealing, merchant banking, securities underwriting, and investment advisory services.
- A nonbank company generating 85% of gross income from financial services can turn into a FHC.
- A financial holding company (FHC) is a bank holding company that can offer non-banking financial services.
FAQ
What Can a Financial Holding Company (FHC) Do That a Bank Holding Company Can't?
Financial holding companies can guarantee insurance, deal in securities, participate in merchant banking, endorse initial public offerings (IPOs), and give investment advisory services. Traditional banks are not permitted to perform these services.
What Happens on the off chance that the Fed Gives a Financial Holding Company an Unsatisfactory Rating?
Assuming a financial holding company gets an unsatisfactory rating it must not perform any extra FHC activities or get a company that performs such activities, either straightforwardly or in a roundabout way. These denials must stay in place until the FHC gets a satisfactory rating or better.
What Is the Main Reason for Becoming a Financial Holding Company (FHC)?
The fundamental motivation to turn into a financial holding company is to have the option to take part in more service offerings to clients. Traditional banks can give a limited number of services. By turning into a financial holding company, a bank can offer a lot more services and develop its client base and profits.
