Federal Reserve examiners may be broadly defining merchant banking to include high-tech joint ventures and could force banks to move these investments to holding company units.
"I was stunned," said John L. Douglas, chairman of the financial services practice at the Alston & Bird law firm in Atlanta, who is working with a bank that is under pressure from the Fed.
Mr. Douglas, a former general counsel at the Federal Deposit Insurance Corp., said bank subsidiaries are freer to deal with affiliates than are holding company units.
The Office of the Comptroller of the Currency has let national bank subsidiaries form joint ventures with data crunchers, Internet services providers, and other technology firms by defining these services as "incidental" to banking.
Typically, the ownership of these subsidiaries is divided among the bank, a high-tech company, and outside investors. Often the technology firms involved are start-ups and are using deals with banks to jumpstart their business. But experts said that the investments differ from merchant banking because they are being done to provide a service to customers and are connected with banking.
"The notion that the Fed would be involved in regulating national bank joint ventures is something that I can assure you the industry would be very concerned about," said William J. Sweet Jr., a partner at the Skadden, Arps, Slate, Meagher, & Flom law firm in Washington.
"Among the mid-size to larger banks, this kind of joint venture has been critical to their ability to form strategic partnerships with dot-com companies where an agreement to provide services or obtain services is typically associated with an investment interest in the dot-com directly or in a joint venture," Mr. Sweet said.
Deals between banks and high-tech information services companies have been multiplying in recent months.
Bank of America and Ariba Inc., a software firm based in Mountain View, Calif., announced last week that they were forming a joint venture company, Banc of America Marketplace LLC, to run a so-called "Internet marketplace" where companies can buy and sell goods. A month earlier, PNC Bank unveiled a joint venture with Perot Systems Corp. called BillingZone that would let corporations deliver and pay bills over the Internet.
Small banks are inking similar deals. City National Bank of Charleston, W.Va., bought an Internet services provider and Web site development firm in 1998 and provides online access to customers. Lamar Bank based in Purvis, Miss., teamed up last year with a computer maker and a cellular phone company to provide customers with low-cost personal computers and discounted Web access. …