Magazine article American Banker

SBICs: Fed Plan Would Stifle Start-Ups

Magazine article American Banker

SBICs: Fed Plan Would Stifle Start-Ups

Article excerpt

Industry representatives assert that the Federal Reserve's merchant banking proposal misjudges the riskiness of investments in small business investment companies and would choke off funding for hundreds of start-up firms. The Fed in March proposed requiring financial holding companies to reserve 50 cents of capital against every dollar invested in merchant banking activities, including SBICs, which the Fed considers as risky as any other form of equity investing. Floyd W. Collins, president of Independent Bankers Capital Fund, a Dallas SBIC, said that raising the capital requirement from the current 8% held by most banks to 50% would reduce banks' participation in his SBIC and the amount of money it has to invest in small businesses. "Some of our bank investors have told us that with the higher requirement they would not have invested," said Mr. Collins. "With a higher reserve ratio they have less equity in the bank for traditional banking purposes." The government created SBICs in 1958 to channel venture capital into small businesses. Banks may own SBICs directly or invest in independent SBICs like the one run by Mr. Collins. According to the Small Business Administration, there are 101 bank-owned SBICs in the United States, with $5.3 billion of assets, or 61% of all SBIC assets. In 1999, SBICs invested $4.2 billion in U.S. companies, most of which had been in business for fewer than three years. In testimony before Congress last week, Lee W. …

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