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Fed Proposes Ban on Merchant Banking, a Practice With Little Risk 

September 14, 2016

Steven Davidoff Soloman, The New York Times

The Federal Reserve has taken dead aim on merchant banking, proposing to ban the practice as part of a “take no risk” regulation strategy. Merchant banking has been around for centuries. Why crack down now?

The business originated during the Italian Renaissance. Small, family-run banks would finance sea voyages and other trading missions, taking a share of the profits. This was high-risk finance. All could be lost as a result of a storm, the occasional war or even piracy. In the following centuries, merchant banking spread across Europe and then to the United States, becoming the occupation of the big banking houses like J.P. Morgan.

Bank trading activities are more limited today. Now, when the term “merchant banking” is used, it generally refers to banks like Goldman Sachs buying and selling nonfinancial companies. In other words, when banks act like private equity or venture capital firms in buying a company or investing in a start-up.

Despite merchant banking’s storied past, the Federal Reserve has seized this moment to try to strike it down. Under the Dodd-Frank Act, the Fed was required to conduct a study of risk-taking by banks like Goldman and Bank of America. Read more

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