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What is a Financial Holding Company?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

A financial holding company (FHC) is a company which is allowed to offer a wide range of financial services to its customers. In the United States, activities of financial companies were limited by laws such as the Glass-Steagall Act until 1999, when the Gramm-Leach-Bliley Act was passed, allowing for the creation of financial holding companies. Some critics of the latter legislation have argued that financial holding companies contributed to the conditions in the market which brought about a major crisis in 2008 when the subprime mortgage bubble popped.

Financial holding companies can offer a number of different services, including merchant banking, financial advice, insurance underwriting, and dealing and underwriting of securities. Historically, activities such as banking and insurance were required to be separated by law, and when this was changed several prominent firms merged to make financial holding companies offering both services. Other nonbanking activities are also allowed at financial holding companies, which are regulated by the Federal Reserve Board.

In the United States, financial holding companies are regulated by the Federal Reserve.
In the United States, financial holding companies are regulated by the Federal Reserve.

In order to become a financial holding company, a company must apply and demonstrate that it is well managed and properly capitalized. In addition, the member institutions must have a rating of satisfactory or higher under the Community Reinvestment Act. This requirement was a bone of contention during negotiations about the passage of the 1999 bill and was kept in at the insistence of the Clinton Administration. The precise services offered at a financial holding company vary, depending on how it is organized and the nature of the companies under its umbrella.

Bank holding companies may merge with other companies to become financial holding companies.
Bank holding companies may merge with other companies to become financial holding companies.

Companies with more than 85% of their business interests concentrated in nonbanking financial activities can apply to become financial holding companies. If accepted, the new financial holding company must sell off interests which are not financial in nature within 10 years. Bank holding companies may merge with other companies to become financial holding companies, as seen when banks and insurance companies merge.

Congress in 1999 passed the Gramm-Leach-Bliley Act, allowing for the creation of financial holding companies.
Congress in 1999 passed the Gramm-Leach-Bliley Act, allowing for the creation of financial holding companies.

Proponents in the banking industry argued that the financial holding company was better able to provide many services to customers. Streamlining service under the banner of a single company could facilitate a wide range of services and options. In addition, the deregulation of the industry was believed to be beneficial for the financial world as a whole. Critics argued that the deregulation had the opposite effect and contributed to business practices which led to unwise lending practices and other poor business decisions, ultimately contributing to economic problems.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

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    • In the United States, financial holding companies are regulated by the Federal Reserve.
      By: Abel Tumik
      In the United States, financial holding companies are regulated by the Federal Reserve.
    • Bank holding companies may merge with other companies to become financial holding companies.
      By: Pefkos
      Bank holding companies may merge with other companies to become financial holding companies.
    • Congress in 1999 passed the Gramm-Leach-Bliley Act, allowing for the creation of financial holding companies.
      By: Zap Ichigo
      Congress in 1999 passed the Gramm-Leach-Bliley Act, allowing for the creation of financial holding companies.