Equity Investment & Merchant Banking Activities
July 10, 2000
Circular No. 11258

To the Chief Executive Officers of All State Member Banks, Bank Holding Companies, Edge Corporations, and Branches and Agencies of Foreign Banks in the Second Federal Reserve District:

The Federal Reserve Board has issued examination guidance identifying sound practices for equity investment and merchant banking.

Merchant banking and equity investment have emerged as an increasingly important source of earnings at some institutions. The Gramm-Leach-Bliley Act enacted in November provides additional merchant banking authority for financial holding companies.

While equity investments in non-financial companies can contribute substantially to earnings, such investments, like other rapidly growing and highly profitable business lines, can entail significant market, liquidity and other risks. Sound investment and risk management practices and strong capital positions are critical elements in the prudent conduct of these activities.

The guidance reflects actual industry practices compiled from a number of industry and supervisory sources including insights gained during supervisory reviews of banking organizations engaged in equity investment activities under SBIC and BHC authorities. The guidance discusses basic safety and soundness issues regarding the management of equity investments, identifies sound investment and risk management practices that merit the attention of both management and supervisors, and advises supervisors to encourage banking institutions to make appropriate public disclosures relevant to their equity investments.

The Board's supervisory letter (SR 00-9) and the guidance paper (pdf) are available.

Questions may be directed, at this Bank, to Stefan Walter, Vice President or James Currie, Senior Bank Examiner.