Number of New Financial Holding Companies Growing Slowly

When the Gramm-Leach-Bliley Act (GLBA) became effective in March, qualifying bank holding companies were authorized to operate as financial holding companies (FHCs) and engage in a wider range of financial activities, including securities underwriting and dealing, insurance underwriting and merchant banking activities. As the regulatory structure developed, the Fed was eager to learn how many holding companies would take advantage of these new powers and how they would manage the opportunities and risks involved.

In an interim rule outlining the election process (issued Jan. 19), the Fed predicted that "approximately half of all bank holding companies will file this declaration during the first year." That estimate seems to have been optimistic by most accounts. While the influx of declarations was heavy early on, Reserve Banks report that the number of new filings has slowed significantly. As of mid-September, only 33 of the District's 550 bank holding companies have effectively elected to be treated as financial holding companies. Interestingly, three-fourths of the FHCs in the Eighth District are considered "community organizations" (generally defined as institutions with under $500 million in total assets).

The requirements and process for becoming an FHC are quite simple. A bank holding company qualifies for FHC status if each of its subsidiary depository institutions (banks or thrifts) is well-capitalized, well-managed and rated satisfactory for compliance with the Community Reinvestment Act. A bank holding company's FHC election is processed by the Fed within 30 calendar days.

According to Dennis Blase, assistant vice president of the St. Louis Fed's Applications Section, the scope and level of activities conducted by District FHCs thus far have been minimal. "There are several apparent factors," says Blase. "Smaller companies may lack the resources needed to conduct these types of activities. Larger organizations, on the other hand, may be waiting for more information on how FHCs will be supervised and the capital standards that may be required for FHCs."

On Aug. 15, the Fed issued a supervisory letter outlining the purpose and scope of its supervision of financial holding companies. This guidance focuses on GLBA's provisions for working with the functional regulators of a company's securities, insurance and commodities subsidiaries. For the full text of this letter, see the Fed's web site: For more information on the declaration process and permissible activities, contact Patrick Pahl at (314) 444-8858.