The Clearing House (TCH) submitted to the Fed the results of a TCH empirical data study on the merchant banking activities conducted by financial holding companies (FHCs). TCH undertook the study in order to develop an empirical basis upon which to respond to (i) the Fed’s suggestion in a September 2015 proposed rulemaking curtailing commodities activities that the Fed might increase risk-based capital requirements for all merchant banking activities to account broadly for perceived corporate veil-piercing risk; and (ii) the Fed’s recent recommendation in the Dodd-Frank Act Section 620 Report that Congress repeal merchant banking authority altogether, citing similar risks. The TCH study examined the merchant banking activities conducted by twelve FHCs most active in this space, and found that:

• The size and scope of merchant banking activities are significant (and certainly greater than the Fed had estimated) – for example, at year-end 2015, the twelve FHCs in our study relied on merchant banking authority to maintain more than $30 billion of direct capital investments in nonfinancial companies across a range of industries (including $11 billion in renewable energy projects), and to manage more than $207 billion in client assets.
• The frequency with which FHCs exercise routine management or operation of merchant banking portfolio companies is extremely limited (the Fed cited “routine management or operation” as key risk driver).
• TCH could find no evidence of corporate veil-piercing in our data set (the Fed had cited veil-piercing as the greatest risk posed by merchant banking).
• The current risk-based capital requirements for merchant banking activities are more than sufficient based on an empirical analysis of actual historical losses examined in the study (the Fed had not cited to any empirical analysis to support raising capital requirements).