For many years the Glass-Steagall Act restricted commercial banks even from certain other financial activities, particularly investment banking and insurance, much less non-banking business. Now that Glass-Steagall has finally been repealed, allowing for more competitive banking institutions, the US Federal Reserve Board is proposing that US financial holding companies should only undertake a well-defined range of approved activities. BIS Review 53/2000  2  In the UK, there is no legal prohibition on banks participating in non-financial activities. But in practice few of the banks do so. This is partly the result of stringent treatment of capital adequacy by the regulator - banks are required to deduct from their regulatory capital dollar for dollar of any investment they make in non-financial activities. It is also because the banks are widely held, with no dominant shareholder who has other non-financial interests. The banks therefore have little incentive to control non-financial companies through their investments. Germany has had a different approach. German banks have traditionally held major long-term equity stakes in industrial groups, such as Daimler-Benz or Thyssen. This arrangement gave the industrial groups long-term strategic shareholders, who could look beyond the next quarter’s financial results. But it has also frozen the structure of the industrial groups, and prevented them from merging, restructuring and rationalising, as US companies have done. It has made it harder for the banks to deploy their assets flexibly, to maximise their own returns, and to become as spry and competitive as US banks.

Scope of permitted activities MAS will determine the scope of activities which the bank or FHC will be permitted to undertake. Besides financial activities, they will include activities which have clear synergies with the bank’s financial business. We will not have a fixed list of permitted activities. Instead we will exercise flexibility to allow banks to undertake business ventures that are related to their core competencies, such as e-commerce activities that are changing the banking industry worldwide. These include providing payment services in support of e-commerce, and leveraging on banks’ IT competencies to provide IT services, especially in building infrastructure and applications for B2B e-commerce. Banks will also be allowed to undertake equity portfolio and venture capital investments. We will define an equity portfolio investment to be one where the bank and its financial affiliates do not have control over the investee company, e.g. by being the largest shareholder. An equity portfolio investment should generally not exceed 10% of the investee company’s capital. Furthermore, each equity portfolio investment will be subject to a single security limit of 2% of the bank’s capital funds. We will amend Section 31 of the Banking Act to remove the existing aggregate limit on portfolio 5  BIS Review 53/2000  investments, and replace it with this new single security limit. We will also exclude debt instruments from Section 31 because they are generally less risky than equities. Venture capital investments will be treated separately.