CONVERGENCE 
OVERVIEW

Spurred by the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLB), many leading financial services companies are now doing business across sectors. GLB permits banks, securities firms and insurance companies to affiliate with each other through the financial holding company (FHC) structure. FHCs can engage in activities other than banking as long as they are financial in nature. The most important of these are securities underwriting and dealing, insurance underwriting, insurance agency activities and merchant banking, a form of equity financing.

The first step in electing FHC status is becoming a bank holding company (BHC), a company that owns one or more banks. BHCs must meet certain eligibility requirements in terms of capital, management and community investment to become an FHC. GLB allows existing BHCs that have opted for FHC status to acquire full service securities firms and insurance companies. It also permits insurers and securities firms to buy a bank and thus become a BHC eligible for FHC status. One example is Met Life, which purchased a bank and became a FHC.

GLB also allowed banks owned by BHCs to expand into financial services activities by creating financial subsidiaries. Income from these subsidiaries’ activities flows up to the BHC parent, and is reported as income by the parent. But the activities permitted banks are not as broad as for FHCs. Financial subsidiaries of banks may not engage in insurance underwriting. In addition, they may not engage as a principal in providing or issuing annuities or in real estate development and investment, merchant banking or insurance investment activities. Before passage of GLB, BHCs could be involved in the securities business, but what they were permitted to do was strictly limited by law.

NUMBER OF FINANCIAL HOLDING COMPANIES,
2001-2005 (1)


(End of year)







Number of domestic FHCs (2)567602612600591
Number of foreign FHCs (3)2330323638
     Total number of FHCs590632644636629

(1) To avoid double-counting, only the top-tier bank holding company in a multitier organization is included.
(2) Bank holding company whose ultimate parent is incorporated in the United States.
(3) Bank holding company whose ultimate parent is a foreign bank or other organization chartered outside the United States.

Source: Board of Governors of the Federal Reserve System.

  • In 2005 the Federal Reserve approved requests from 35 domestic bank holding companies and three foreign banks seeking financial holding company status.