Federal regulators issued a rule Friday that, effective immediately, lets financial holding companies make a wide variety of investments, including taking 100% ownership of nonfinancial companies.
However, the Federal Reserve Board and the Treasury Department imposed a $6 billion cap on merchant banking and generally limited investments to 10 years. Under a separate proposal, financial holding companies would face a stiff capital charge equal to 50% of investments.
The rule and proposal are a blow to banking industry executives who had urged regulators for weeks not to impose new capital requirements or impose time limits on investments. The expanded merchant banking powers are the most coveted benefit of the Gramm-Leach-Bliley Act of 1999, which overhauled the nation's financial laws.
The rules "take the most attractive new investment authority granted banks and put a huge set of brakes on it," said Robert J. Kabel, legislative counsel for the Bank Private Equity Coalition. "It really flies in the face of what the Congress had in mind."
William H. McDavid, general counsel at Chase Manhattan Corp., said the rules will give brokers and insurers an advantage over banks.
The new law permits banks, securities firms, and insurance companies to own each other, but requires such conglomerates to form financial holding companies regulated by the Fed. Brokers or insurers that do not want to buy a bank do not have to form financial holding companies, and face few restrictions on merchant banking.
"This is a rule that would be applicable to financial holding companies but would not be applicable to competitors," Mr. McDavid said. "It has the potential of creating an inequality inconsistent with the thrust of Gramm-Leach-Bliley and could discourage companies not subject to Fed regulation today from ever becoming financial holding companies."
Financial Services Roundtable lobbyist Lisa McGreevy called the rules "unduly harsh."
"The regulators were not required by Congress to issue any regulations in this area," she added.
But Treasury Under Secretary for Domestic Finance Gary Gensler said the rules are necessary to ensure the law's mandates are followed, particularly its provisions barring permanent mergers between banking and commercial companies. "There's an importance to keeping a separation between banking and commerce," he said Friday.
The law did not specifically require new capital rules, but the Fed and Treasury said that they are necessary to protect the financial integrity of diversified financial companies, many of which will be embarking on venture capital and …