Banks Get 15-Year Minimum to Hold Risky Investments Under New Modernization Act

The aptly named Merchant Banking Modernization Act is short, but its impact on how banks manage risk is significant. This bill changes Section 4(k)(7)(A) of the Bank Holding Company Act of 1956, which governs how long bank holding companies can keep their merchant banking investments. Essentially, it extends the minimum time banks must hold these investments to 15 years—a massive jump from previous unstated, but generally shorter, expectations.

The Fine Print: Locking Up Capital for 15 Years

Merchant banking is when a bank takes a direct equity stake in a company, often a private one, rather than just lending money. Think of it as a bank acting like a venture capitalist or private equity firm. Previously, banks were expected to divest these non-core, often illiquid investments within a few years to keep their focus on, well, banking. This bill throws that timeline out the window, mandating that the standard holding period for these investments cannot be less than 15 years. This applies even to investments already sitting on the bank’s books; for those, the 15-year clock starts ticking from the original purchase date.

What This Means for Your Bank and the Economy

For the banks themselves, this is a huge win for flexibility. It means they don't have to rush sales of these assets, potentially allowing them to wait for maximum returns on long-term projects. If a bank invested in a startup that takes 12 years to go public, they now have the certainty that they won't be forced to sell prematurely. However, this flexibility comes with a massive trade-off for the financial system as a whole. Extending the holding period to a minimum of 15 years means banks are locking up capital in potentially illiquid, non-core assets for a very long time. This increases the bank’s long-term exposure to risk, reducing the regulatory pressure to quickly exit investments that might turn sour.

The Real-World Risk Shift

Imagine your bank, where you keep your savings and check your balance, now has a significant chunk of its capital tied up in long-shot private equity deals for a decade and a half. While the bank benefits from the potential upside, the extended timeline means the financial system has less oversight on these risky assets. If these long-term bets go sideways, it’s the depositors and, ultimately, the taxpayers who could be indirectly impacted by increased systemic risk. The retroactive application is particularly concerning, as it prevents banks from divesting assets they might have planned to liquidate sooner under the old rules, effectively trapping capital in these long-term holdings against their original exit strategy. This bill provides certainty for long-term investors, but it also means the financial safety net is holding onto risk for significantly longer.