S-2663-119
Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
Sponsored by Mike Rounds (R-SD)
What it does
This bill would modify the rules governing "merchant banking" — the authority that allows financial holding companies (large banks and their affiliates) to make equity investments in commercial and industrial companies. The specific provisions are not detailed in the bill text as introduced, but merchant banking modernization legislation typically would update investment limits, holding periods, or oversight requirements under the Bank Holding Company Act. The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs and has not yet been amended or marked up.
Who benefits
Large financial holding companies and their investment arms, which could gain expanded authority or reduced restrictions on equity investments in commercial firms. Private equity and venture capital sectors, which may benefit from reduced competition barriers or clearer rules. Commercial and industrial companies seeking capital from bank-affiliated investors. Potentially small and mid-sized businesses if the bill expands access to bank-sourced equity financing.
Who is hurt
Smaller community banks that lack merchant banking authority and may face increased competitive pressure from larger institutions. Non-bank commercial lenders and independent private equity firms that compete with bank-affiliated investors. Consumers and the broader public if expanded bank involvement in commercial firms increases systemic financial risk. Employees of commercial companies acquired by bank affiliates, if the bill reduces oversight of those investments.
Supporters argue
Supporters argue that current merchant banking rules, established under the Gramm-Leach-Bliley Act of 1999, are outdated and prevent U.S. financial institutions from competing effectively with foreign banks and private equity firms that face fewer restrictions. They contend that modernizing these rules would channel more capital into American businesses, particularly in emerging industries, and that robust Federal Reserve oversight already provides sufficient safeguards against systemic risk.
Opponents argue
Opponents argue that expanding bank involvement in commercial companies blurs the line between banking and commerce — a separation that has been a cornerstone of U.S. financial regulation since the Bank Holding Company Act of 1956 — and that the 2008 financial crisis demonstrated the dangers of allowing large financial institutions to take on complex, illiquid equity positions. They contend that loosening these rules could increase systemic risk and create conflicts of interest that harm both borrowers and the broader financial system.
Constitutional context
Congress has broad authority to regulate financial institutions and their investment activities under the Commerce Clause (Art. I, §8, cl. 3), as banking and capital markets are quintessentially interstate commercial activity under Wickard v. Filburn (1942). If the bill delegates significant new rulemaking authority to the Federal Reserve or other agencies, post-Loper Bright (2024) courts would independently review whether any resulting agency rules stay within the statutory boundaries Congress sets.
Checks and balances
Congress would set the new statutory framework; the Federal Reserve and potentially other banking regulators (OCC, FDIC) would gain or retain rulemaking and supervisory authority over merchant banking activities; courts would independently review agency rules under post-Loper Bright standards.
Historical precedent
The Gramm-Leach-Bliley Act of 1999 established the current merchant banking authority for financial holding companies, repealing Depression-era Glass-Steagall separations between banking and commerce; subsequent Federal Reserve rules set the investment limits and holding periods this bill would likely modify.