FRB Guidance June 22, 2000
Page 1 of 14
Guidance on Equity Investment and Merchant Banking Activities of
Financial Holding Companies and Other Banking Organizations
Supervised by the Federal Reserve
I. Introduction
Over the past several years, investing in the equity of non-financial companies1 and
lending to private equity-financed companies, have emerged as increasingly important sources of
earnings and business relationships at a number of banking organizations.2 While equity
investments in non-financial companies can contribute substantially to earnings, such investment
activities, like many other fast growing business lines, can entail significant market, liquidity,
and other risks. Equity investments can also give rise to increased volatility of both earnings and
capital. Accordingly, sound investment and risk management practices are critical in conducting
these activities.
This guidance discusses various sound practices related to the equity investment activities
of banking organizations that merit the attention of management, examiners, and other
supervisory staff. The guidance first describes the legal and regulatory authority under which
banking organizations may make equity investments. It then discusses basic safety and
soundness issues regarding the management of equity investments at banking organizations and
identifies sound management practices for conducting these activities. The guidance specifically
targets the equity investment activities of financial holding companies (FHCs), bank holding
companies (BHCs), state member banks, and their affiliates, regardless of the authority under
which investments are made.
Given the important role that market discipline plays in controlling risks, the guidance
also addresses the need for supervisors to encourage appropriate public disclosures of equity
investment activities by banking organizations and sets forth recommendations for the scope of
such disclosures. Finally, the guidance discusses various issues involving the provision of
tradition