Bank Rules Are Eased for Stakes in Nonfinancial Firms
01/19/2001, The Wall Street Journal

WASHINGTON -- Federal regulators agreed to ease limits on bank investments in venture-capital funds and other nonfinancial companies, bowing to industry and congressional complaints that prior rules were too restrictive.

The Federal Reserve and the Office of the Comptroller of the Currency said that banks will only have to set aside in reserves capital equal to 15% to 25% of the value of an investment. That is well below their initial proposal of 50%, made in March of last year.

Banking-industry lobbyists said the new proposal was a significant improvement. "It's a much more reasonable proposal than the 50%, across the board, one-size-fits all capital charge," said Beth L. Climo, executive director of the American Bankers Association's Securities Association.

Regulators believe that banks, which hold the nation's deposits and are covered by federal deposit insurance, should be held to higher safety and soundness standards than their rivals when entering risky businesses involving equity, including merchant banking and venture capital.

But banks say that requiring them to set aside large amounts of capital puts them at an unfair disadvantage when competing with investment banks. Investment banks take no deposits and thus are held to a much looser regulatory standard.

The initial rule would have required banks to set aside 50 cents for every dollar invested in a nonfinancial company. The capital requirement in the new rules would depend on the level of investment, ranging from 15 cents to 25 cents for every dollar invested. The greater proportion of a bank's portfolio invested in equities, the higher the set-aside requirement.


  1. Why should there be any restrictions on bank investments in the equity of other companies?
  2. Why is a distinction made between commercial banks and investment banks in terms of regulation?
  3. What would be the impact of the new rules on the governance of corporations?
  4. Why do the regulations make a distinction between a bank's investment in equity versus debt:?