Financial Holding Companies (Section 4(k) of the BHC Act)
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Financial Holding Companies
(Section 4(k) of the BHC Act) Section 3900.0
WHAT’S NEW IN THIS REVISED 3900.0.1 FHC SUPERVISORY
SECTION OVERSIGHT AUTHORITY
Effective January 2015, footnote 1 is revised to Under the GLB Act, the Federal Reserve has
indicate that SR-12-17/CA-12-14 supersedes supervisory oversight authority and responsibil-
SR-99-15. See section 2124.05 of this manual. ity for BHCs, including BHCs that operate as
FHCs. The GLB Act sets forth parameters for
operating relationships between the Federal
The Gramm-Leach-Bliley Act (the GLB Act)
Reserve and other regulators. The statute differ-
became effective on March 11, 2000. The GLB
entiates between the Federal Reserve’s relations
Act authorized affiliations among banks, securi-
with (1) depository institution regulators and
ties firms, insurance firms, and other financial
(2) functional regulators, which include insur-
companies. To further this goal, the GLB Act
ance, securities, and commodities regulators.
amended section 4 of the BHC Act to allow a
There should be minimal, if any, noticeable
bank holding company (BHC) or foreign bank
change in the well-established relationships
that qualifies as a financial holding company
between the Federal Reserve as BHC (including
(FHC) to engage in a broad range of activities
FHC) supervisor and the bank and thrift supervi-
that (1) the GLB Act defines as financial in
sors (federal and state). The Federal Reserve’s
nature or incidental to a financial activity, or
relationships with functional regulators will, in
(2) the Board, in consultation with the Secretary
practice, depend on the extent to which an FHC
of the Treasury, determines to be financial in
is engaged in functionally regulated activities;
nature or incidental to a financial activity. Fur-
those relationships will also be influenced by
thermore, section 4 of the BHC Act authorizes
existing working arrangements.
an FHC to engage in designated financial activi-
The Federal Reserve’s supervisory oversight
ties, including insurance and securities under-
role is that of an umbrella supervisor concentrat-
writing and agency activities, merchant bank-
ing on a consolidated or group-wide analysis of
ing, and insurance company portfolio investment
an organization. Umbrella supervision is not an
activities.
extension of more traditional bank-like supervi-
The GLB Act includes conditions that must sion throughout an FHC. The FHC framework
be met for a BHC or a foreign bank to be is consistent with and incorporates principles
deemed a ‘‘financial holding company’’ and that are well established for BHCs. The FHC
engage in expanded activities. The GLB Act supervisory policy focuses on addressing super-
also allows an FHC to seek Board approval to visory practice for and relationships with FHCs,
engage in any activity that the Board determines particularly those that are engaged in securities
(1) is complementary to a financial activity and or insurance activities. See SR-00-13.
(2) does not pose a substantial risk to the safety
and soundness of depository institutions or the
financial system generally. BHCs that do not 3900.0.2 ROLES OF SUPERVISORS
qualify as FHCs are limited to engaging in those
nonbanking activities that were permissible under The Federal Reserve is responsible for the con-
section 4(c)(8) of the BHC Act before enact- solidated supervision of FHCs. In this regard,
ment of the GLB Act. the Federal Reserve will assess the holding com-
The GLB Act provides that, in most cases, an pany on a consolidated or group-wide basis with
FHC may engage in or acquire the shares of a the objective of ensuring that the holding com-
company that is engaged in financial activities pany does not threaten the viability of its deposi-
without obtaining prior approval from the Board. tory institution subsidiaries. The manner in which
An FHC is instead required to provide a post- the Federal Reserve fulfills this role will likely
commencement notice to the Board within 30 evolve along with the activities and structure of
days after commencing a financial activity or FHCs, and it may differ depending on the mix
acquiring a company. See section 4(k) of the of banking, securities, and insurance activities
BHC Act. Prior approval from the Board is of an FHC.
required to acquire or engage in the activities of Depository institution subsidiaries of FHCs
a savings association. are supervised by their appropriate primary bank
BHC Supervision Manual January 2015
Page 1Financial Holding Companies (Section 4(k) of the BHC Act) 3900.0
or thrift supervisor (federal and state). The GLB to duplicate or replace supervision by the pri-
Act did not alter the role of the Federal Reserve, mary bank, thrift, or functional regulators of
as holding company supervisor, vis-a-vis the FHC subsidiaries. Rather, FHC supervision seeks
primary supervisors of FHC-associated bank to protect the depository institution subsidiaries
and thrift subsidiaries. Traditionally, the Federal of increasingly complex organizations with sig-
Reserve has relied to the fullest extent possible nificant interrelated activities and risks, while
on those supervisors. not imposing an unduly duplicative or onerous
Nonbank (or nonthrift) subsidiaries engaged burden on the subsidiaries of the organization.
in securities, commodities, or insurance activi- Effective financial holding company supervision
ties are supervised by their appropriate func- requires—
tional regulators. Such functionally regulated
subsidiaries include a broker, dealer, investment 1. strong, cooperative relationships between the
adviser, and investment company registered with Federal Reserve and primary bank, thrift,
and regulated by the Securities and Exchange and functional regulators and foreign super-
Commission (SEC) (or, in the case of an invest- visors (these relationships respect the indi-
ment adviser, registered with any state); an vidual statutory authorities and responsibili-
insurance company or insurance agent subject to ties of the respective supervisors, but also
supervision by a state insurance regulator; and a allow for enhanced information flows and
nonbank subsidiary engaged in activities regu- coordination so that individual responsibili-
lated by the Commodity Futures Trading Com- ties can be carried out effectively without
mission (CFTC). creating duplication or excessive burden);
2. substantial reliance by the Federal Reserve
on reports filed with or prepared by bank,
3900.0.3 FHC SUPERVISION thrift, and functional regulators, as well as on
OBJECTIVES publicly available information for both regu-
lated and nonregulated subsidiaries; and
The Federal Reserve, as umbrella supervisor, 3. continued reliance on the risk-focused super-
will seek to determine that FHCs are operated in vision and examination process and on mar-
a safe and sound manner so that their financial ket discipline.
condition does not threaten the viability of affili-
ated depository institutions. Oversight of FHCs
(particularly those engaged in a broad range of 3900.0.4 FHC SUPERVISION IN
financial activities) at the consolidated level is PRACTICE
important because the risks associated with those
activities can cut across legal entities and busi- The supervisory activities of the Federal Reserve
ness lines. The purpose of FHC supervision is to fall into three broad categories: (1) information
identify and evaluate, on a consolidated or group- gathering, assessments, and supervisory coop-
wide basis, the significant risks that exist in a eration; (2) ongoing supervision; and (3) promo-
diversified holding company to assess how these tion of sound practices and improved disclosure.
risks might affect the safety and soundness of
depository institution subsidiaries.
Accordingly, the Federal Reserve will focus 3900.0.4.1 Information Gathering,
on the financial strength and stability of FHCs, Assessments, and Supervisory
their consolidated risk-management processes, Cooperation
and overall capital adequacy. The Federal Reserve
will review and assess the internal policies, To fulfill its GLB Act responsibilities, the Fed-
reports, and procedures and the effectiveness of eral Reserve needs to interact closely and
the FHC consolidated risk-management pro- exchange information with the primary bank,
cess. The appropriate bank, thrift, or functional thrift, and functional regulators. The Federal
regulator will continue to have primary respon- Reserve will foster strong relationships with
sibility for evaluating risks, hedging, and risk senior management and the boards of directors
management at the legal-entity level for the of FHCs, and have access to timely informa-
entity or entities that it supervises. tion from FHCs. These relationships will need
FHC supervision is not intended to impose to include heads of significant business lines
bank-like supervision on FHCs, nor is it intended and key internal-audit, control, and risk-
management officials in order to understand
BHC Supervision Manual January 2015 how risk-management and internal-control poli-
Page 2 cies and procedures established at the consoli-Financial Holding Companies (Section 4(k) of the BHC Act) 3900.0
dated level are being implemented and assessed. meetings is to develop an understanding of
To achieve these objectives, Federal Reserve the risk profiles of the individual regulated
supervisory staff will take the following actions: legal entities and their relation to the FHC’s
overall risk profile. These meetings also should
1. Regularly assess an FHC’s centralized risk- be used, when appropriate, to share informa-
management and control processes. Such tion regarding supervisory plans and to coor-
assessments are necessary to understand an dinate supervisory activities and follow-up,
organization’s overall risk profile, identify as needed.
material contributions to core risks, and deter- 2. Review the examination findings of primary
mine how such risks are being managed and bank, thrift, and functional regulators (and
controlled on a consolidated basis. their self-regulatory organizations) together
2. Perform limited, targeted transaction testing. with other relevant information. The purpose
The purpose of this transaction testing is to of this review is to develop a consolidated
verify that the risk-management systems of picture of the FHC’s financial condition and
the FHC are adequately and appropriately risk profile, the effectiveness of risk-
measuring and managing areas of risk for the management and internal-control policies,
organization, and to confirm that laws and and the implications for the affiliated deposi-
regulations applicable to the FHC and within tory institutions.
the jurisdiction of the Federal Reserve are 3. Make available to primary bank, thrift, and
being observed. functional regulators, to the extent permis-
3. Have periodic discussions with FHC senior sible, pertinent information regarding the
management and boards of directors. Such FHC. Included is information on the finan-
discussions will enable the Federal Reserve cial condition, risk-management policies, and
to build relationships with key personnel and operations of an FHC that may have a mate-
to understand changing activities and the rial impact on individual regulated subsidi-
evolving risk profile of the consolidated aries, as well as information concerning trans-
organization. Periodic discussions also will actions or relationships between the regulated
provide a forum for supervisory staff to pres- subsidiaries and other subsidiaries within the
ent any findings or concerns related to the FHC group. This process will assist supervi-
activities of the group as a whole or to busi- sors in performing their statutory and super-
ness lines that cut across legal entities. visory responsibilities over regulated
4. Have periodic discussions with key person- subsidiaries.
nel. Discussions will be held with the person-
nel responsible for corporate management 4. Participate in the sharing of information
and control functions, such as heads of busi- among international supervisors, consistent
ness lines, risk management, internal audit, with applicable law. The purpose of this
and internal control. exchange is to ensure that an FHC’s global
activities are supervised on a consolidated
When performing the above tasks, Federal basis and to minimize material gaps in
Reserve supervisory staff, to the extent possible, supervision.
will coordinate their actions with those of the 5. Review internal-audit and management
primary bank, thrift, and functional regulators of reports and publicly available information
the FHC’s subsidiaries. For example, to under- (including market information on equity and
stand the risks and risk-management systems of debt prices of the consolidated organiza-
an FHC at the consolidated level, the Federal tion), as well as reports and statistics col-
Reserve will need information concerning assets lected by other regulators, including regula-
or liabilities booked in significant bank, thrift, tors of depository institution subsidiaries. To
and functionally regulated subsidiaries within limit regulatory burden, this information
the FHC group. The primary bank, thrift, and should be obtained, to the fullest extent pos-
functional regulators of such subsidiaries also sible, from (1) the parent organization; (2) pri-
may need information from the FHC to perform mary bank, thrift, and functional regulators
their respective statutory mandates. To assist in of the FHC’s regulated subsidiaries; and
sharing needed information, Federal Reserve (3) publicly available sources, such as exter-
supervisory staff should do the following: nally audited financial statements.
1. Have periodic meetings with the primary
bank, thrift, and functional regulators of an BHC Supervision Manual January 2015
FHC’s subsidiaries. The purpose of these Page 3Financial Holding Companies (Section 4(k) of the BHC Act) 3900.0
3900.0.4.2 Ongoing Supervision The Federal Reserve may examine a function-
ally regulated subsidiary under certain circum-
3900.0.4.2.1 FHC Structure, stances. Before examining a functionally regu-
Management, and the Applications lated subsidiary, supervisory staff should first
Process seek to obtain the necessary information from
the appropriate functional regulator. If an exami-
The Federal Reserve is responsible for under- nation is determined to be necessary, the Federal
standing the consolidated organization’s legal, Reserve should coordinate its actions with the
organizational, and risk-management structure; appropriate functional regulator. An examina-
major business activities; and risk exposures tion may be conducted when the Federal Reserve
and risk-management systems. The Federal has reasonable cause to believe (or reasonably
Reserve needs to understand the nature and determines) that—
degree of involvement of the board of directors
in overseeing their organization’s risk- 1. the subsidiary is engaged in an activity that
management and control process at the consoli- poses a material risk to an affiliated deposi-
dated group level. The Federal Reserve, when tory institution,
considering any formal application, declaration, 2. the examination is necessary to be adequately
or notification at the FHC level, will coordinate, informed about the FHC’s systems for moni-
as appropriate, with primary bank, thrift, and toring and controlling the financial and
functional regulators. operational risks that may pose a safety-and-
soundness risk to a depository institution
subsidiary; or
3900.0.4.2.2 Reporting and Examination 3. the subsidiary is not in compliance with any
The Federal Reserve will rely, to the fullest federal law that the Board has specific juris-
extent possible, on reports that an FHC or its diction to enforce (and the Board cannot
subsidiaries are required to file with federal or determine compliance by examining the FHC
state authorities (or self-regulatory organiza- or its affiliated depository institutions).
tions) or on reports that are prepared by the
federal or state authorities. The Federal Reserve The Federal Reserve, consistent with its cur-
will rely on routinely prepared management rent practice, will continue relying to the fullest
reports, publicly reported information, and extent possible on the work performed by bank,
externally audited financial statements. The Fed- thrift, and functional regulators to validate that
eral Reserve also will rely to the fullest extent material risks are measured and managed
possible on the examination of an FHC’s bank adequately at the regulated subsidiary level.
and nonbank subsidiaries by their appropriate Where necessary and appropriate, and consis-
primary bank, thrift, and functional regulators tent with (1) through (3) immediately above, the
(and their self-regulatory organizations). Federal Reserve may conduct or participate in
If supervisory staff requires a specialized reviews at banks, thrifts, or functionally regu-
report from a functionally regulated subsidiary lated subsidiaries to validate that risk-
of an FHC, staff will first request it from the management and internal-control policies estab-
subsidiary’s appropriate functional regulator. In lished at the consolidated level are being
the event that the report is not made available to implemented effectively.
the Federal Reserve, supervisory staff may obtain For an FHC subsidiary that is not supervised
the report directly from the functionally regu- by a bank, thrift, or functional regulator, the
lated subsidiary if it is necessary to assess— Federal Reserve will obtain information from
the subsidiary, as appropriate and necessary, to
1. a material risk to the FHC or any of its assess the financial condition of the FHC as a
depository institution subsidiaries; whole. In addition, the Federal Reserve will
2. compliance with any federal law that the conduct examinations of such subsidiaries, if
Federal Reserve has specific jurisdiction to necessary, to be informed about (1) the nature of
enforce against the FHC or a subsidiary; or the subsidiary’s operations and financial condi-
3. the FHC’s systems for monitoring and con- tion, (2) the subsidiary’s financial and opera-
trolling financial and operational risks that tional risks that may pose a threat to the safety
may pose a safety-and-soundness threat to a and soundness of any depository institution sub-
depository institution subsidiary. sidiary of the FHC, and (3) the systems for
monitoring and controlling such risks. Under
BHC Supervision Manual January 2015 the GLB Act, the Federal Reserve may not
Page 4 examine any subsidiary of an FHC that is anFinancial Holding Companies (Section 4(k) of the BHC Act) 3900.0
investment company registered with the SEC of capital and varying approaches to asset and
and that is not itself a BHC. liability valuations. Yet techniques for assessing
capital adequacy must be able to identify situa-
tions such as double or multiple leverage or
3900.0.4.2.3 Capital Adequacy double-gearing. In such cases, the actual capital
protection may be overstated.
The Federal Reserve is responsible for assessing
consolidated capital adequacy for FHCs, with
the ultimate objective of protecting the insured 3900.0.4.2.4 Intra-Group Exposures and
depository subsidiaries from the effects of dis- Concentrations
ruptions in the nonbank portions of the organi-
zation. Capital adequacy will be assessed in Intra-group exposures, including servicing
relation to the risk profile of the consolidated arrangements and risk concentrations, have the
organization. The Federal Reserve will review potential to threaten the condition of regulated
the FHC’s internal risk assessment and related entities. Intra-group exposures may be signifi-
capital-analysis process for determining the cant at large, complex FHCs, especially those
adequacy of its overall capital position. Such a that operate their businesses on global lines that
review will include consideration of current and cut across legal entities within the firm. The
future economic conditions, business- Federal Reserve’s focus in this area is the poten-
development plans for the future, possible stress tial impact of intra-group exposures and concen-
scenarios, and internal risk-control and audit trations on insured depository institution subsid-
procedures. As BHCs, FHCs are subject to the iaries of an FHC.
Federal Reserve’s holding company capital guide- Risk concentrations can take many forms,
lines, which set forth minimum capital ratios including exposures to one or more counterpar-
that serve as tripwires for additional supervisory ties or related entities, industry sectors, and geo-
scrutiny and corrective action. The Federal graphic regions. For risk concentrations, the
Reserve will review these requirements as they holding company supervisor is uniquely posi-
apply to FHCs and may, if warranted, adapt the tioned to understand the combinations of expo-
manner in which they apply to FHCs that engage sures within an organization across all legal
in a broad range of financial activities. entities. This understanding is critical at the
Although the Federal Reserve is responsible group level—risk concentrations that are pru-
for assessing the consolidated capital adequacy dent on a legal-entity basis may aggregate to an
of FHCs, the primary bank, thrift, or functional unsafe level for the consolidated organization.
regulators of FHC subsidiaries will continue to The Federal Reserve will monitor intra-group
set and enforce applicable capital requirements exposures and risk concentrations as follows:
for the regulated entities within their jurisdic-
tion. Under the GLB Act, the Federal Reserve 1. The appropriate primary bank and thrift regu-
may not establish separate capital adequacy lators will continue to monitor and enforce
requirements for an FHC subsidiary that is in section 23A and 23B restrictions at the bank
compliance with the capital requirements of its or thrift level. The Federal Reserve will focus
functional regulator. on assessing whether the FHC monitors and
Consistent with current practice, the Federal ensures compliance with these statutory
Reserve will continue to place significant reli- requirements. The Federal Reserve plans to
ance on the primary bank, thrift, or functional begin collecting data from each depository
regulator’s analysis of the capital adequacy of a institution subsidiary of BHCs, including
regulated subsidiary. That analysis will be a FHCs, on their covered transactions with
significant input in the Federal Reserve’s assess- affiliates that are subject to sections 23A and
ment of an FHC’s consolidated capital adequacy, 23B and will share that data with primary
especially when a securities broker-dealer or bank and thrift regulators.
insurance company is a predominant part of an 2. Functional regulators will continue to moni-
FHC. tor and enforce any intra-group exposure
Several issues become particularly important restrictions that may apply to the regulated
when assessing the consolidated capital adequacy entities under their jurisdictions.
of FHCs with functionally regulated subsidi- 3. The Federal Reserve will focus on under-
aries. The capital adequacy requirements that standing and monitoring related-party expo-
have been established for banking, securities,
and insurance entities by their respective regula- BHC Supervision Manual January 2015
tors reflect varying definitions of the elements Page 5Financial Holding Companies (Section 4(k) of the BHC Act) 3900.0
sures at the group level (including areas such the primary responsibility of the functional regu-
as servicing agreements, derivatives expo- lator.
sures, and payments-system exposures). An Under the existing bank holding company
important emphasis will be the extent to framework, the Federal Reserve coordinates
which risk management in a group’s subsidi- enforcement actions with the primary bank and
ary depository instutions depends on transac- thrift regulators, possibly with some adaptation
tions with affiliates. of the action for the holding company context
4. The Federal Reserve will focus on manage- (such as limitations on parent company debt or
ment’s effectiveness in monitoring and con- dividends). The Federal Reserve will continue
trolling intra-group exposures and risk con- to coordinate enforcement actions with these
centrations. The Federal Reserve will consider regulators. Similarly, the Federal Reserve will
how an organization’s risk-management pro- coordinate with functional regulators when for-
cesses measure and manage group-wide risk mulating and issuing enforcement actions that
concentrations. involve or may have an impact on functionally
regulated subsidiaries.
3900.0.4.2.5 Enforcement Powers
3900.0.4.3 Promotion of Sound Practices
The Federal Reserve is authorized generally to and Improved Disclosure
take enforcement action against FHCs and their
nonbank subsidiaries. The primary bank and
thrift supervisors have the authority to take The Federal Reserve can promote sound prac-
enforcement action against the banks and thrifts tices in a number of ways, such as by monitor-
under their respective jurisdictions. Under the ing trends in risk exposures and risk-
GLB Act, the Federal Reserve may take management practices across the FHC population
enforcement action against a functionally regu- through a combination of efforts, including—
lated subsidiary of an FHC, but only when such
action is necessary to prevent or redress an 1. regular discussions, centered on specific issues
unsafe or unsound practice or breach of fidu- and emerging risks, with FHC management;
ciary duty that poses a material risk either to 2. regular meetings with primary bank, thrift,
(1) the financial safety, soundness, or stability of and functional regulators to explore and dis-
an affiliated depository institution or (2) the cuss issues of mutual interest or concern;
domestic or international payments system. In 3. interagency working groups or specialty teams
such circumstances, the Federal Reserve may to gain early insight into risks that cut across
only take the action if it is not reasonably pos- the various entities of a conglomerate or
sible to protect effectively against the material groups of conglomerates; and
risk through an action directed at or against an 4. industry conferences on relevant topics of
affiliated depository institution. interest.
Under any circumstances, the Board may take
enforcement action against a functionally regu- These initiatives will contribute to the develop-
lated subsidiary to enforce compliance with any ment of sound practices that the Federal Reserve
federal law that the Federal Reserve has specific and the primary bank, thrift, and functional
jurisdiction to enforce against the subsidiary. If regulators can communicate to the senior man-
the Federal Reserve believes that an enforce- agement and boards of directors of the FHCs, as
ment action against a functionally regulated well as to the senior management of their bank
entity is necessary, the Federal Reserve will and nonbank subsidiaries.
notify the entity’s appropriate functional regula- Improved transparency and public disclosure
tor and, whenever practical, will coordinate such can meaningfully supplement the efforts of
an action with any action taken by the func- supervisors to monitor the increasingly complex
tional regulator. It is expected that the Federal and global activities of diversified banking orga-
Reserve will not take an enforcement action nizations. Consistent with sound accounting prin-
against a functionally regulated subsidiary (or a ciples, practices, and depository institution safety-
person associated with the subsidiary) if the and-soundness practices, the Federal Reserve
problem involves factors and statutes that are will participate in efforts to enhance disclosures
that will illuminate group-wide activities, risk
BHC Supervision Manual January 2015 exposures, risk management, controls, and intra-
Page 6 group exposures.Financial Holding Companies (Section 4(k) of the BHC Act) 3900.0
3900.0.4.4 Supervisory Response to 1. cooperative arrangements with bank and thrift
Challenges Posed by FHCs regulators, the SEC, the CFTC, state insur-
ance and securities regulators, and foreign
The Federal Reserve’s response to the supervi- supervisors;
sory challenges of FHCs has been in the context 2. relationships with the FHC management and
of the consolidated supervision of BHCs.1 personnel responsible for significant risk-
Examples include greater reliance on risk- management functions and, when necessary,
focused supervision; strengthening relationships the management of the organization’s non-
with senior management; improving coordina- bank subsidiaries;
tion with other federal, state, and international 3. information flows that provide supervisors
regulatory and supervisory authorities; greater with relevant, up-to-date information without
reliance on specialty teams, sound-practices imposing an unwarranted burden on financial
papers, and public disclosures; and simplifica- organizations;
tion of the applications process. 4. techniques for evaluating capital adequacy
The more diversified FHCs present new for FHCs engaged in an expanded range of
supervisory challenges. To address these chal- nonbank financial activities;
lenges, the Federal Reserve will continue to 5. public disclosures and market discipline;
strengthen— 6. techniques for assessing the overall risk pro-
file of FHCs and the implications for affili-
ated depository institutions; and
7. incentives for FHCs to continually review
and improve their risk-management pro-
cesses, internal controls, and audit practices.
1. The Federal Reserve’s framework for supervising large
The Federal Reserve is committed to working
complex banking organizations (LCBOs) is described in constructively and cooperatively with all regula-
SR-12-17/CA-12-14, “Consolidated Supervision for Large tors involved in overseeing the activities of
Financial Institutions.” See section 2124.05. FHCs and their bank and nonbank subsidiaries.
BHC Supervision Manual January 2015
Page 7U.S. Bank Holding Companies Operating as Financial Holding
Companies (Section 4(k) of the BHC Act) Section 3901.0
To become a financial holding company (FHC), consulting with the appropriate federal banking
a domestic bank holding company (BHC) must agency for each depository institution involved
file a written declaration with the appropriate in the merger.
Federal Reserve Bank. This declaration should A depository institution that results from the
contain the following information: merger of a depository institution that is well
managed with one or more depository institu-
1. A statement that the BHC elects to be an tions that are not well managed or that have not
FHC. been examined will be considered to be well
2. The name and head-office address of the managed, if the Board determines that the result-
company and each depository institution con- ing institution is well managed. The Board
trolled by the company. For purposes of the makes this determination after a review of the
election process for both domestic BHCs and managerial and other resources of the resulting
foreign banks, the term ‘‘depository institu- institution and after consulting with the appro-
tion’’ here means any national bank, state- priate federal and state banking agencies for the
chartered bank, federal branch of a foreign institutions involved in the merger, as
bank, insured branch of a foreign bank, sav- applicable.
ings association, savings bank, and industrial The Gramm-Leach-Bliley Act (the GLB Act)
bank. It also includes any trust company that also requires that all the insured depository insti-
engages in the business of receiving deposits tutions controlled by the FHC at the time of the
other than trust funds. (See 12 U.S.C. 1813.) declaration must be rated satisfactory or better
A depository institution does not have to under the Community Reinvestment Act (CRA).
have FDIC insurance. When determining whether the insured deposi-
3. A certification that all depository institutions tory institutions controlled by a BHC meet the
controlled by the company are well capital- CRA requirement, the Federal Reserve excludes
ized as of the date the company files its an institution that was acquired during the 12
declaration. months preceding the date the company filed its
4. The capital ratios for all relevant capital mea- declaration. To qualify for this exception, (1) the
sures (as defined in section 38 of the Federal company must have submitted the depository
Deposit Insurance Act), as of the close of the institution’s affirmative correction plan to the
previous quarter, for each depository institu- appropriate federal banking agency and (2) the
tion controlled by the company on the date agency must have accepted the plan.
the company files its declaration. A BHC must file its declaration to become an
5. A certification that all depository institutions FHC with the appropriate responsible Reserve
controlled by the company are well managed Bank. A BHC’s election to become an FHC is
as of the date the company files its declara- effective on the thirty-first day after the date that
tion. a complete declaration was received, unless the
Board notifies the company before that time that
A depository institution is well managed if, at the election is ineffective. The Board or the
the most recent inspection or examination or appropriate Federal Reserve Bank also may
subsequent review by its appropriate federal notify a BHC in writing that its election to
banking agency, the institution received (1) at become an FHC is effective before the thirty-
least a satisfactory composite rating and (2) at first day after the date that a complete declara-
least a satisfactory rating for management, if tion was filed.
such a rating is given. In the case of a deposi- When an FHC’s declaration becomes effec-
tory institution that has not received an inspec- tive, it may engage in the expanded financial
tion or examination rating, a depository institu- activities available to such companies. If, how-
tion is well managed if the Board has determined, ever, the Board has timely notified a BHC that
after a review of the depository institution’s its declaration is ineffective, the BHC will not
managerial and other resources and after con- be considered an FHC and may not begin to
sulting with the depository institution’s appro- engage in any expanded activities.
priate federal and state banking agency, that the A company that is not a BHC may simulta-
institution is well managed. In addition, a deposi- neously submit an application under section
tory institution that results from the merger of 3(a)(1) of the Bank Holding Company Act (BHC
two or more depository institutions that are well
managed will be considered to be well managed BHC Supervision Manual July 2009
unless the Board determines otherwise after Page 1U.S. Bank Holding Companies Operating as Financial Holding Companies 3901.0
Act) to become a BHC and to request to become Y.) To do so, the acquisition must meet three
an FHC on consummation of that transaction. requirements:
The company must (1) state that it seeks to
become an FHC on consummation of its section 1. The company to be acquired must be sub-
3 proposal to become a BHC and (2) certify that stantially engaged in activities that are finan-
each depository institution that would be con- cial in nature, incidental to a financial activ-
trolled by the company on consummation of the ity, or otherwise permissible for the FHC
section 3 proposal will be both well capitalized under section 4(c) of the BHC Act. A com-
and well managed on the date of consummation. pany is considered to be substantially engaged
To coordinate action on these two requests, the in permissible activities if at least 85 percent
acceptance of the declaration as complete does of the company’s consolidated total annual
not occur until the date the company lawfully gross revenues is derived from and at least
consummates its section 3 proposal and becomes 85 percent of the company’s consolidated
a BHC. A simultaneous declaration will not be total assets is attributable to the conduct of
effective if the Board notifies the company at activities that are financial in nature, inciden-
any time before consummation that (1) any tal to a financial activity, or otherwise per-
depository institution that would be controlled missible for an FHC under section 4(c) of the
by the company on consummation will not be BHC Act. An FHC’s management should
well capitalized and well managed or (2) any consult with Board staff if they are uncertain
insured depository institution that would be con- whether a proposed acquisition meets this
trolled by the company on consummation has standard.
not achieved at least a satisfactory rating at its 2. The FHC must comply with the notice
most recent CRA examination. An insured deposi- requirements of section 225.87 of Regulation
tory institution that is controlled or would be Y. The acquired company must conform, ter-
controlled by a company filing a simultaneous minate, or divest, within two years of the
declaration and section 3(a)(1) application to date the FHC acquires shares or control of
become a BHC may not be excluded for the the company, all activities that are not finan-
purposes of evaluating the CRA performance cial in nature, incidental to a financial activ-
record under this provision or the general FHC ity, or otherwise permissible for the FHC
certification requirements of section 225.82(d) under section 4(c) of the BHC Act. Although
of Regulation Y. an FHC may acquire any percentage of shares
In most cases, an FHC may, without provid- or control of a company engaged in limited
ing prior notice to or obtaining prior approval impermissible activities, the FHC needs only
from the Board, conduct an activity that is finan- to provide a post-transaction notice if such
cial in nature or incidental to a financial activity an acquisition results in control of the company.
(a financial activity). (See section 225.85(a)(1) 3. After being acquired by an FHC, the com-
of Regulation Y.) An FHC may conduct a finan- pany engaged in impermissible activities may
cial activity by engaging directly in the activity not engage in or acquire a company engaged
or by acquiring and retaining the shares of any in any activity that is not permissible for the
company that is engaged exclusively in one or FHC.
more financial activities. An FHC may conduct
a financial activity at any location inside or Section 225.85(c) of Regulation Y identifies
outside of the United States, subject to the laws two circumstances in which Board approval is
of the jurisdiction in which the activity is con- still required to engage in financial activities.
ducted. A company acquired or to be acquired First, prior approval in accordance with section
by an FHC also may engage in other activities 4(j) of the BHC Act and section 225.24 of
that are permissible for an FHC, in accordance Regulation Y is required to acquire more than
with any applicable notice, approval, or other 5 percent of the voting shares or control of a
requirements. savings association or any company that owns,
An FHC may acquire more than 5 percent of operates, or controls a savings association. Sec-
the voting shares or control of a company that is ond, the Board may, in the exercise of its super-
not engaged exclusively in activities that are visory authority, require an FHC to provide it
financial in nature, incidental to financial activi- with prior notice or obtain prior Board approval
ties, or otherwise permissible for the acquiring if circumstances warrant. The GLB Act did not
FHC. (See section 225.85(a)(3) of Regulation change in any way the requirement that a com-
pany receive prior Board approval under section
BHC Supervision Manual July 2009 3 of the BHC Act before acquiring shares or
Page 2 control of a bank.U.S. Bank Holding Companies Operating as Financial Holding Companies 3901.0
Section 225.87(a) of Regulation Y requires manner and may involve the issuance of cease-
an FHC that commences an activity, or that and-desist orders, the execution of written agree-
acquires control or shares of a company engaged ments, or other appropriate supervisory action.
in an activity under section 225.86 of Regula-
tion Y, to provide written notice to the appropri-
ate Reserve Bank within 30 calendar days after 3901.0.2 HOLDING COMPANY FAILS
commencing the activities or consummating the TO CONTINUE MEETING FHC
acquisition. The notice must be provided on the CAPITAL AND MANAGEMENT
FR Y-10 form, obtained from the Board or any REQUIREMENTS
Reserve Bank. This requirement also applies to
an activity that the FHC may engage in under If a domestic bank holding company has made
section 4(c)(8) of the BHC Act that is incorpo- an effective election to be an FHC, and the
rated under section 4(k) of the act. Board finds that any depository institution sub-
There are two circumstances in which notice sidiary owned or controlled by the company
to the Board is not required to engage in an ceases to be well capitalized or well managed,
activity: (1) when an FHC acquires shares of a the company must execute an agreement accept-
company without acquiring control of the com- able to the Federal Reserve Board to comply
pany, or (2) when an FHC is engaged in securi- with all applicable capital and management
ties underwriting, dealing, or market-making requirements. This agreement should be executed
activities described in section 4(k)(4)(E), mer- within 45 days after the Board notifies the com-
chant banking investment activities conducted pany that it is not in compliance with the appli-
pursuant to section 4(k)(4)(H), or insurance cable requirements for an FHC. (See section
company investment activities conducted pursu- 225.83 of Regulation Y.)
ant to section 4(k)(4)(I) of the BHC Act, and At the request of the bank holding company,
has provided the System with the appropriate the Federal Reserve Board may extend the 45-
notice regarding the relevant activity. (See sec- day period. The request should state why an
tion 225.87(b) of Regulation Y.) Under these extension is necessary. The agreement must
circumstances, the FHC must provide written explain the specific actions that the bank hold-
notice to the Board within 30 days after acquir- ing company will take to correct all areas of
ing, as part of a merchant banking activity under noncompliance, provide a schedule for all such
section 4(k)(4)(H) or an insurance company actions, and provide any other information the
investment activity under section 4(k)(4)(I) of Board may require, and be acceptable to the
the BHC Act, more than 5 percent of any com- Board.
pany at a cost that exceeds 5 percent of the During the period of noncompliance, the Fed-
FHC’s tier 1 capital or $200 million, whichever eral Reserve Board may impose limitations or
is less. conditions on the activities of the company. In
addition, the company must obtain the Board’s
approval before conducting any of the activities
3901.0.1 SUPERVISORY CONCERNS that are newly authorized for FHCs by the GLB
Act. Section 225.83 of Regulation Y also sets
In some instances, a U.S. BHC or a foreign bank forth the consequences of failing to correct the
may meet the statutory requirements to be an noncompliance within a period of 180 days.
FHC, but its capital strength and managerial Such consequences may include divestiture of
resources are less than satisfactory on a consoli- ownership or control of any depository institu-
dated basis. In this situation, the Federal Reserve tion the company owns or controls, or the cessa-
may have supervisory concerns about the con- tion of the expanded activities permitted for
solidated entity although it technically qualifies FHCs.
as an FHC. The Federal Reserve may, in the
exercise of its supervisory authority, restrict or
limit the conduct of new activities or future 3901.0.3 DEPOSITORY INSTITUTION
acquisitions of an FHC, or take other appropri- SUBSIDIARY FAILS TO MAINTAIN A
ate action, if it finds that the FHC does not have SATISFACTORY OR BETTER CRA
the financial or managerial resources to conduct RATING
the activity or make the acquisition. This super-
visory action could be based, for example, on a The Federal Reserve Board prohibits an FHC
determination that the company does not have
adequate capital or risk-management systems to BHC Supervision Manual December 2001
conduct a specific activity in a safe and sound Page 3U.S. Bank Holding Companies Operating as Financial Holding Companies 3901.0
from engaging in any additional activity1 or trolled by the FHC fails to maintain a satisfac-
acquiring control of a company engaged in any tory or better CRA rating.
activity under section 4(k) and 4(n) of the BHC
Act if any insured depository institution con- 1. With respect to engaging in any additional activities, see
section 225.84 of Regulation Y for the exceptions.
3901.0.4 LAWS, REGULATIONS, INTERPRETATIONS, AND ORDERS
Subject Laws 1 Regulations 2 Interpretations 3 Orders
BHCs and foreign banks that qualify 1843
as FHCs can engage in financial
activities and those incidental thereto
Definition of an FHC 225.81 4-056
Election to become an FHC 225.82 4-056.1
Failure to meet applicable capital and 225.83 4-056.2
management requirements
Consequences of the failure to main- 225.84 4-056.3
tain at least a satisfactory CRA rating
Notices or approvals for FHCs to 225.85 4-056.4
engage in financial activities
Activities permissible for FHCs 228.86 4-056.5
Post-commencement notice for FHC 225.87 4-056.6
to engage in a financial activity
Board determination that an FHC 225.88 4-056.7
activity is financial in nature or inci-
dental thereto
Board approval for an FHC to engage 225.89 4-056.8
in an activity that is complementary to
a financial activity
1. 12 U.S.C., unless specifically stated otherwise. 3. Federal Reserve Regulatory Service reference.
2. 12 C.F.R., unless specifically stated otherwise.
BHC Supervision Manual December 2001
Page 4Foreign Banks Operating as Financial Holding
Companies (Section 4(k) of the BHC Act) Section 3903.0
3903.0.1 FINANCIAL HOLDING ter, and as of the close of the most recent
COMPANY QUALIFICATION audited reporting period
REQUIREMENTS FOR FOREIGN 3. a certification that the foreign bank meets the
BANKS standards to be well capitalized that are set
out in section 225.90(b)(1)(i) and (ii) or sec-
A foreign bank that owns or controls a U.S. tion 225.90(b)(2) of Regulation Y, as of the
bank (and any company that controls the foreign date the foreign bank or company files its
bank) must comply with the same requirements election
as a domestic bank holding company (BHC) 4. a certification that the foreign bank is well
that elects to be treated as a financial holding managed, as defined in section 225.90(c)(1)
company (FHC). Either entity is thus able to of Regulation Y, as of the date the foreign
engage in authorized financial activities under bank or company files its election
the Gramm-Leach-Bliley Act (GLB Act). If a 5. a certification that all U.S. depository institu-
foreign bank does not own a subsidiary bank in tions controlled by the foreign bank or com-
the United States, but instead operates through a pany (including thrifts and nonbank trust
branch, agency, or commercial lending com- companies) are well capitalized and well
pany located in the United States, the foreign managed as of the date the foreign bank or
bank (and any company that controls the foreign company files its election
bank) is subject to the Bank Holding Company 6. the capital ratios and all relevant capital mea-
Act (BHC Act) as if the foreign bank or com- sures (as defined in section 38 of the Federal
pany were a BHC. Such foreign banks may, like Deposit Insurance Act) for all U.S. deposi-
U.S. BHCs, also elect to be treated as FHCs. tory institution subsidiaries of the foreign
Foreign banks electing to be treated as FHCs bank or company as of the end of the previ-
must meet ‘‘well-capitalized’’ and ‘‘well- ous quarter
managed’’ standards comparable to those that
are applicable to U.S. depository institutions. The well-capitalized and well-managed tests in
Futher, any U.S. branches of the foreign bank items 2, 3, and 4 above apply to each foreign
that are FDIC-insured must be rated satisfactory bank that has U.S. operations in the form of a
or better under the Community Reinvestment branch, agency, or commercial lending com-
Act (CRA).1 (See section 225.90 of Regulation pany subsidiary that is part of a foreign banking
Y.) organization seeking certification as an FHC.
To be treated as an FHC, a foreign bank (or a For those foreign banks whose home-country
company that owns or controls a foreign bank) supervisors have adopted risk-based capital stan-
that operates in the United States only through dards consistent with the Basel Accord, their
U.S. branches, agencies, or commercial lending tier 1 and total risk-based capital ratios, as calcu-
subsidiaries must file a written declaration with lated under the home-country standard, must be
the appropriate Reserve Bank. This declaration at least 6 percent and 10 percent, respectively.
must contain items 1 through 6 below. Foreign The Board will determine the comparability of
banks or companies that operate in the United the foreign bank’s capital under the listed com-
States through U.S. branches, agencies, or com- parability factors in section 225.92(e) of Regula-
mercial lending companies and through a U.S. tion Y. Among these factors are the composition
subsidiary bank are not required to provide item of the foreign bank’s capital, accounting stan-
1, but they must provide the items domestic dards, long-term debt ratings, the ratio of tier 1
BHCs are to provide. capital to total assets, reliance on government
support to meet capital requirements, the for-
1. a statement that the foreign bank or company eign bank’s anti–money laundering procedures,
elects to be treated as an FHC whether the foreign bank is subject to compre-
2. the risk-based capital ratios and the amounts hensive consolidated supervision, and other fac-
of tier 1 capital and total assets of the foreign tors that may affect the analysis of capital and
bank as of the close of the most recent quar- management.2 For those foreign banks whose
1. Under the GLB Act, the capital and management stan- 2. The Board may consider whether the overall level of the
dards the Board must apply to foreign banking organizations foreign bank’s capital and other factors indicate that addi-
that elect to become FHCs should be comparable to the
standards applied to domestic institutions, giving due regard
to the principle of national treatment and equality of competi- BHC Supervision Manual December 2001
tive opportunity. Page 1Foreign Banks Operating as Financial Holding Companies 3903.0
home-country supervisors have not adopted the The Board believes that, as a general rule, the
Basel Accord and for any other foreign banking top tier foreign bank in a foreign banking group
organizations that otherwise do not meet the that requests an FHC determination should be
capital standards noted above, the foreign bank subject to comprehensive consolidated supervi-
may be considered well capitalized by obtaining sion by the home-country supervisor.
from the Board a prior determination that its As a general matter, a foreign bank will not
capital is otherwise comparable to the capital be determined to be well capitalized and well
that would be required of a U.S. banking organi- managed when it is not subject to comprehen-
zation to become an FHC. The pre-clearance sive consolidated supervision. When a foreign
process provided by section 225.91(c) of Regu- bank has not been determined by the Board to
lation Y can be used to obtain this determina- be subject to comprehensive consolidated super-
tion. vision, and the Board has not deemed any other
A foreign bank will be considered well man- bank from the country where the foreign bank is
aged if— chartered to be subject to comprehensive con-
solidated supervision, the foreign bank must use
1. the branches, agencies, and commercial lend- the pre-clearance process provided by section
ing subsidiaries of the foreign bank have 225.91(c) of Regulation Y—even if it otherwise
received at least a satisfactory composite rat- meets the objective screening criteria. The Board
ing at their most recent examination;3 may review a foreign bank’s home-country
supervision through the pre-clearance process
2. the home-country supervisor of the foreign and make a comprehensive consolidated super-
bank consents to the foreign bank expanding vision determination in that context. The Board
its activities in the United States to include will try to make a determination on pre-
FHC activities;4 and clearance requests within 30 days of receipt.5
3. the Board determines that the management There may be limited situations when an
of the foreign bank meets standards compa- exceptionally strong bank from a country that
rable to those required of a U.S. bank owned has not yet fully implemented comprehensive
by an FHC. consolidated supervision should be considered
for FHC status. Such a foreign bank can qualify
for FHC status if (1) the home-country supervi-
tional analysis should be undertaken to assess comparability. sor has made significant progress in adopting
The Board will not impose a specific standard for the foreign and implementing arrangements for the consoli-
bank’s ratio of tier 1 capital to total assets (the leverage ratio), dated supervision of its banks, and (2) the for-
but a foreign bank’s leverage ratio may be among the factors
taken into account in the comparability review.
eign bank demonstrates significant financial
3. The Federal Reserve’s foreign bank examination pro- strength, such as through high levels of capital
cess includes the assignment of a combined assessment (the or exceptional asset quality. The Board antici-
combined ROCA rating) of a foreign banking organization’s pates, however, that a foreign bank that is not
(FBO’s) U.S. branch, agency, and commercial lending opera-
tions through the regular examination cycle. (See SR-00-14.)
subject to comprehensive consolidated supervi-
The combined ROCA rating will be factored into the FBO’s sion will be granted FHC status only in rare
overall combined U.S. operations rating, which will continue instances.
to be a single composite rating that reflects the U.S. supervi- As in the case of domestic BHCs, each U.S.
sors’ collective assessment of all operations (that is, banking
and nonbanking) of the FBO in the United States. If a foreign
depository institution subsidiary of a foreign
bank wishes to obtain FHC status, but does not have the bank is required to meet all the well-capitalized
assignment of a combined U.S. banking assessment as part of and well-managed standards in order for the
the regular examination cycle, the foreign bank can contact its foreign bank or company to obtain FHC status
responsible Federal Reserve Bank or engage in the pre-
clearance process. If a foreign banking group contains more
in the same manner as required for U.S. BHCs.
than one foreign bank with U.S. banking offices, each such In addition, all the U.S. insured depository insti-
foreign bank in the group must have a satisfactory composite tutions controlled by the foreign bank or com-
U.S. banking assessment in order for the foreign banking pany must be rated satisfactory or better under
group or any of its subsidiaries to obtain FHC status.
4. The home-country supervisor should consider the FBO’s
the CRA. If the foreign bank operates a U.S.
consolidated capital and management before providing its branch that is FDIC-insured, the branch must be
consent to the expansion. If the home country has no formal rated satisfactory or better under the CRA.
consent process, the Board will consult with the supervisor to
assure itself that the supervisor considers the capital and
management of the bank to satisfy its home-country standards
5. If the Board makes an affirmative comprehensive con-
and that the supervisor has no objections to the expansion.
solidated supervision determination through the FHC pre-
clearance process, the determination will be relied on for the
BHC Supervision Manual December 2001 foreign bank to establish additional branches and agencies
Page 2 under the Foreign Bank Supervision Enhancement Act.Foreign Banks Operating as Financial Holding Companies 3903.0
An election by a foreign bank or company to ply with all applicable capital and management
be treated as an FHC will become effective on requirements. This agreement should be executed
the thirty-first day after the date that an election within 45 days after the Board notifies the for-
was received by the appropriate Reserve Bank, eign bank or company that it is not in compli-
unless the Board notifies the foreign bank or ance with the applicable requirements for an
company before that time that the election is FHC. (See section 225.93 of Regulation Y.) At
ineffective or unless the period for the Board’s the request of the foreign bank or company, the
determination is extended with the consent of Board may extend the 45-day period. (The request
the foreign bank or company making the elec- should state why an extension is necessary.) The
tion. The date the Federal Reserve Bank receives agreement must explain the specific actions that
the declaration should be considered the first the foreign bank or company will take to correct
day of the 30-day review period. The Board or all areas of noncompliance, provide a schedule
the Reserve Bank also may notify a foreign for all such actions, provide any other informa-
bank or company in writing that its election to tion the Board may require, and be acceptable to
become an FHC is effective before the thirty- the Board. During the period of non-
first day after the election was filed. A foreign compliance, the Board also may impose limita-
bank or company should file the declaration (or tions or conditions on the U.S. activities of the
pre-clearance request) with the responsible foreign bank or company. Section 225.93 of
Reserve Bank. Regulation Y also sets forth the consequences
If the election is determined to be effective, of failing to correct the noncompliance within a
the foreign bank or company may engage in the period of 180 days. Such consequences may
financial activities available to FHCs. The GLB include termination of the foreign bank’s U.S.
Act requires that an FHC that engages in an branches and agencies and divestiture of its
activity, or that acquires control or shares of a commercial lending company subsidiaries, or
company engaged in an activity, under section cessation of the expanded activities permitted
4(k) of the BHC Act provide written notice to for FHCs. The foreign bank may also choose to
the appropriate Reserve Bank within 30 calen- cease engaging in activities not permitted for a
dar days after commencing the activities or foreign bank under sections 2(h) and 4(c) of the
acquisition. The notice should describe the activity BHC Act.
commenced or identify the name of the com-
pany acquired and describe its activities.
3903.0.3 INSURED BRANCH FAILS
TO MAINTAIN A SATISFACTORY OR
BETTER CRA RATING
3903.0.2 FOREIGN BANK FAILS TO
CONTINUE MEETING FHC CAPITAL When an insured branch of a foreign bank, or an
AND MANAGEMENT insured depository institution controlled by a
REQUIREMENTS foreign bank, fails to maintain a satisfactory or
better CRA rating, section 225.94 of Regulation
If a foreign bank or company has made an Y applies the provisions of section 225.84 to the
effective election, and the Board finds that the foreign bank and to any company that owns or
foreign bank; any foreign bank that is controlled controls the foreign bank. For these purposes,
by the foreign bank and maintains a U.S. branch, the insured branch is treated as an ‘‘insured
agency, or commercial lending company; or any depository institution.’’ An FHC is thus prohib-
U.S. depository institution owned or controlled ited by the Board from engaging in any addi-
by the foreign bank or company ceases to be tional activity or acquiring control of a company
well capitalized or well managed, the foreign engaged in activities under section 4(k) or 4(n)
bank or company must execute an agreement of the BHC Act.( See section 225.84 of Regula-
acceptable to the Federal Reserve Board to com- tion Y.)
BHC Supervision Manual December 2001
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