For immediate release: August 1, 2002
Dallas Fed Examines Banks Merchant Banking Authority
DALLAS—The latest issue of the Federal Reserve Bank of Dallasâ?? Economic and Financial Policy Review examines the effects of certain aspects of the GrahamvLeach Bliley Act of 1999 on banks.
In "Banks Venture into New Territory," senior economist and policy advisor Kenneth J. Robinson of the Financial Industry Studies Department explores the part of financial modernization legislation that allows banks to directly invest in any type of company. This merchant banking authority gives banks greater opportunities to provide venture capital to start-up companies and later-stage equity financing to more mature firms.
Robinson examines how banks have pursued their new merchant banking powers. He finds evidence that organizations that engage in merchant banking tend to be larger than those that do not. His findings are also consistent with the hypothesis that banks may be attempting to lower their average costs by combining merchant banking with other nonbank activities.
Robinson concludes that allowing banking organizations to pursue this new activity will provide them with an additional source of earnings and greater diversification opportunities and will likely increase private equity financing, which has been a vital component of economic activity.
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