WASHINGTON Industry representatives on Friday praised a revised proposal from federal regulators that would set capital requirements for merchant banking activities, though at least one expert said it would clash with broader international capital standards proposed last week.
The latest merchant banking plan would reduce by at least half the capital charges on banking organizations equity investments from what regulators had initially proposed last year.
The new proposal is a very significant revision in the right direction, said Richard Whiting, executive director and general counsel at the Financial Services Roundtable. The proposed changed capital requirements will lift some of the arbitrary burdens and inefficiencies that were contained in the original proposal. Hopefully, it will make more capital available to worthy ventures.
Industry representatives had immediately blasted the initial proposal, issued by the Federal Reserve Board in March, which would have required financial holding companies to hold 50 cents for every $1 of equity investments. Critics argued that the capital charge was too high and contradicted the intent of the Gramm-Leach-Bliley Act of 1999 to give banks more flexibility for investing in start-up companies.
Beset by a firestorm of protest, Fed officials said that they would return to the drawing board. Their second effort has been received far more favorably.
There is no question that the Federal Reserve has clearly listened to the concerns of the industry, said H. Rodgin Cohen, chairman and senior partner in the New York law firm Sullivan & Cromwell. They have really made an effort to meet those concerns because the reduction for the capital charge is significant.
The latest proposal would employ a sliding scale based on each banking organizations aggregate equity investments and Tier 1 capital. It would require them to hold 8 cents for every $1 of equity investments up to 15% of Tier 1 capital, then 12 cents for every $1 of the next 10% of investments. For investments exceeding 25% of Tier 1 capital, banks would have to hold 25 cents for every $1.
The proposal was released Thursday by the Fed and the Office of the Comptroller of the Currency and was approved Friday by the Federal Deposit Insurance Corp. Comments are due 60 days after its imminent publication in the Federal Register, and some criticisms are expected.
Some analysts said the proposal would not jibe with an international capital plan released Tuesday by the Basel Committee on Banking Supervision. This plan would let sophisticated banks use internal ratings systems to vary capital charges based on an assets riskiness. By contrast, the merchant banking proposal would rely solely on the dollar amount of equity investments and does not permit them to be risk-weighted.
This whole thing is loaded with irony, said Bert Ely, an independent industry consultant in Alexandria, Va. Basel is going off in one direction and this regulation is going off in the opposite direction.
Mr. Cohen said the proposal leaves other questions unanswered. Though the revised plan made it clear that the new requirements would not apply to equity held for hedging purposes on international derivatives, it was uncertain whether the requirements would be triggered by domestic equity derivatives.
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