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Merchant Banking: Mixing Banking and Commerce Under the Gramm-Leach-Bliley Act, October 22, 2004 1 (October 22, 2004)

handle is hein.tera/crser0004 and id is 1 raw text is: Order Code RS21134 Updated October 22, 2004 A, CRS Repor for Congress Merchant Banking: Mixing Banking and Commerce Under the Gramm-Leach-Bliley Act Gary W. Shorter Specialist in Business and Government Relations Government and Finance Division Summary A power Congress granted to banking (financial holding) companies in the Gramm-Leach-Bliley Act is merchant banking. It allows them to invest in nonfinancial businesses for a share of the profits. Other countries widely practice merchant banking. Its implementing agency, the Federal Reserve, has seen limited activity under its implementing regulation. Congress has paid attention to these investments because this application of the law, allowing merchant banking, has been controversial. The entire question of the separation of banking and commerce, of which merchant banking forms one part, has come under scrutiny in congressional hearings. This report will be updated as developments warrant. Authorization The Gramm-Leach-Bliley Act (GLBA)1 eased affiliations among banks, securities firms, and insurance companies, under a holding company structure. GLBA repealed the Glass-Steagall Act,2 which, originating in the aftermath of securities market troubles associated with banking practices, had separated the securities/investing business from the banking business since 1933. GLBA created financial holding companies (FHCs) to own (hold) banks and other financial enterprises. The Federal Reserve (Fed) regulates FHCs under the act. GLBA allows FHCs to make equity investments in nonfinancial companies conditional upon their controlling either (1) a securities company, or (2) an investment advisor to an insurance company inside the FHC.3 'P.L. 106-102, 113 Stat. 1338 -1481, Nov. 12, 1999. 2 Sections 20, 21, 26, and 32 of The Banking Act of 1933, P.L. 73-66, June 16, 1933. 3 12 U.S.C. 1843(k). Congressional Research Service -f-! The Library of Congress Prepared for Members and Commitees of Congress

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