WASHINGTON - A pair of financial services trade groups on Tuesday urged the Federal Reserve Board to withdraw proposed rules governing merchant banking investments of financial holding companies, arguing that guidance already published by the central bank has made them unnecessary.
In separate letters to the Fed, the Bank Private Equity Coalition and the Financial Services Roundtable said that the agency's June 22 advisory to examiners and member banks gave enough guidance to ensure that merchant banking investments are made safely.
In March the Fed and the Treasury Department issued a joint interim rule limiting the amount of merchant banking investments and restricting the length of time they can be held. In addition the Fed proposed forcing banks to hold 50 cents of capital for every merchant banking dollar invested.
Banks were particularly upset by the proposed capital requirement and accused the Fed of trying to undercut the expansion of powers banks won with passage of the Gramm-Leach-Bliley Act of 1999. Their complaints of burdensome regulation reached the ears of lawmakers who grilled Fed and Treasury officials in two hearings in June.
The Fed's advisory letter outlines what the central bank called "sound practices," including active oversight of merchant banking activities by senior managers, expanded public disclosures of banks' risk-taking, and strict analysis of interrelationships between banks and the companies they invest in. It also urges institutions with merchant banking activities to use internal capital allocation models that tie economic capital held against merchant banking investments to their riskiness.
The trade groups argue that if banks adhere to such guidelines there is no need for additional rules.
"The letter provides a sound framework for supervision and regulation of financial holding company merchant banking activities," wrote Richard M. Whiting, executive director of the Financial Services Roundtable.
Calling the guidance "more appropriate" than the interim and proposed rules, Mr. Whiting wrote, "The Roundtable recommends that these regulations be revised or withdrawn."
On behalf of the Bank Private Equity Coalition, attorney Robert J. Kabel, wrote: "We support the required adherence to prudent methods of operating equity investment and merchant banking operations because our members have consistently demonstrated this in their own operations for many years."
Because the Fed's advisory letter "establishes a comprehensive regulatory structure to ensure that direct investment and merchant banking operations are conducted in a responsible and prudent manner," Mr. Kabel continued, the coalition "believes that the interim regulation and the proposed capital rules are not necessary."
The Bank Private Equity Coalition includes Chase Capital Partners, BancBoston Capital Inc., Norwest Venture Partners, Bank of America, and DB Capital Partners, a subsidiary of Deutsche Bank.
Both groups pointed out that the Fed's call for risk-based capital allocation conflicts with the proposed rule's 50% blanket capital requirement. Mr. Whiting called the positions "inherently inconsistent" and urged the central bank to "revisit these proposed and interim regulations and consider the appropriate emphasis that [the advisory letter] places on each institution's internal risk management and capital allocation techniques."
The Fed has not given any public indication of when the final rules will be published, but many observers have predicted that it will wait until this session of Congress ends in October.
Mr. Whiting agreed with that prediction. "That has been their approach on a lot of issues that are controversial like this," he said.