WASHINGTON — Merchant banking supports a significant chunk of the renewable energy market and proposed limitations on such activities could harm the market, according to a study released Friday by The Clearing House Association.
The study found that banks have supported more than $30 billion of direct capital investments in nonfinancial companies across a range of industries, including more than $11 billion in the renewable energy sector, which represents roughly 40% of the market's annual financing needs.
The group surveyed 12 of the 21 financial holding companies involved in merchant banking to assess the riskiness of such activities as a response to a Fed proposal that calls for more capital against such activities and would place limits on certain investments.
John Court, the managing director of The Clearing House and its deputy general counsel, said the Federal Reserve's main concern — that a bank's merchant banking activities could subject it to crippling lawsuits that drain its capital in the event of an environmental or other disaster — is unfounded. None of the 372 investments sold for a loss by the banks surveyed exceeded the capital invested. Court argued that the existing Basel III risk-based capital standards are sufficient to protect banks.
“Our results indicate that the current Basel III risk-based capital requirements are approximately 35% higher than the 95th percentile of realized losses on merchant banking investments over the past 15 years, which, we note, included the most severe economic downturn in the postwar period,” Court said. “This does not even account for CCAR [stress tests], which can impose effective capital requirements multiples higher than the Basel III requirements currently imply.”
Banks have long opposed the Fed’s proposal, which has been in development since 2014, when the agency issued an advance notice of proposed rulemaking laying out its basic rationale for tightening banks’ merchant banking activities and overall involvement in the physical commodities markets.
Banks submitted comment letters late last month arguing that the central bank’s proposal effectively nullified Congress’ intent to allow banks to engage in those activities in the 1999 Gramm-Leach-Bliley Act.