Definition
The term financial holding company refers to a corporation offering financial services as well as banking activities. Companies are offered the opportunity to become financial holding companies under the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act of 1999.
Explanation
The Bank Holding Company Act of 1956 prohibited affiliations between companies offering financial services, such as insurance and brokerage accounts, and banks. This restriction was removed by the Financial Services Modernization Act of 1999. Companies that elect to become financial holding companies (FHC), fall under the supervision of the Federal Reserve Board.
The Bank Holding Company Act of 1956 broadly defines a bank holding company as any corporation that has controlling interest over a bank. A financial holding company can also be a bank holding company (BHC) if all of the following requirements are met:
Depository institutions owned by the BHC must be, and remain, well capitalized.
Depository institutions owned by the BHC must be, and remain, well managed.
The BHC must make an effective election to become a financial holding company.
Note: A non-bank company that earns 85% or more of its gross revenues from financial services can choose to become a financial holding company.
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