Federal Regulators Should Return to Gramm-Leach-Bliley's Intent
Sorcher, Alan E., Spellman, James D., American Banker
When Congress passed laws in 1999 to ease Depression-era restrictions on financial services providers, it wanted to promote competition among banks, securities firms, and insurance companies. By allowing all three to own one another, the legislators gave consumers the ability to obtain the broadest range of services at the lowest prices. Congress wanted free market forces rather than regulation to determine whether, for example, a securities firm should buy a bank or be bought by an insurance company.
Unfortunately, as the regulators drew up rules to implement the Gramm-Leach-Bliley Act, which modernized financial services laws, they upset the balance created by Congress. The regulations that the Treasury Department and the Federal Reserve issued to govern merchant banking activities -- venture capital and other nonfinancial equity investments -- make it more difficult for a securities firm to buy a bank and maintain its level of merchant banking activities.
Though the Treasury and the Fed made great strides in addressing concerns raised by their original proposal, their regulations impose severe limitations on merchant banking that are neither necessary for bank safety and soundness nor within the spirit of Gramm-Leach-Bliley. The regulatory agencies continue to operate on the faulty premise that merchant banking poses substantially greater risks than other permissible activities. But the regulators ignore the securities industry's long record of successfully making and managing merchant banking investments. Even the recent large declines in U.S. equity and venture capital markets have not led to any breakdowns or significant problems at securities firms that are actively engaged in merchant banking.
Although the Treasury and Fed have issued final merchant banking rules that are now in effect, we have continued to press for fewer restrictions. Our hope is that the agencies will agree to revisit the necessity for rules after they have had some experience regulating merchant banking. There is a chance to change the bank regulatory agencies' proposal that dictates how much capital must be set aside for each merchant banking investment. The proposal is now under review as the agencies wade through the comment letters, including ours, that have been filed.
Complex and burdensome regulations need to be reduced or even eliminated by the Fed and Treasury if we are to go back to Gramm-Leach-Bliley's original intent. …