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Trades File Merchant Banking Comment Letter

The Clearing House (TCH) along with the ABA, the Financial Services Forum, FSR and IIB filed a comment letter with the Federal Reserve on its proposed rule that would, among other things, impose increased risk-based capital charges on merchant banking investments in companies engaged in physical commodities activities. The proposal also raises the prospect of future action to increase risk-based capital charges for all merchant banking investments. The letter asserts that the proposal: (i) would inappropriately undermine Congress’s statutory grant of merchant banking authority and its allocation of joint rulemaking authority to the Fed and Treasury; (ii) inappropriately seeks to raise capital requirements without empirical analysis or other evidence of risk to safety and soundness; (iii) bases its capital charges on asserted reputational and theoretical risks that are unsubstantiated; and (iv) makes no meaningful attempt to assess the cost of the proposed capital requirements in terms of a loss of funding for actual and potential investee companies, and the economy at large. The letter also suggests the Federal Reserve give deeper consideration to how merchant banking activities contribute to employment and economic growth by providing capital to companies in various stages of development.