Bank Stockholdings in the EU and G - 10 Countries , 1996

Mitchell Berlin* Banks in theU.S. are forbidden to hold stock in nonfinancial firmsundermost circumstances. This restriction contrastswithmore liberal banking regulations in other countries and alsowith the prescriptions of traditional financial theory, which says that a firm’s lenderwouldmake better decisions if it also held some equity in borrowing firms.1 According to this theory a bank that holds an equity share in firms to which it lends would strike a more sensible balance between caution and risk-taking and would also be more concerned about its borrower’s longterm financial health. TheGramm-Leach-Bliley Act of 1999 modestly expands bank powers to hold equity in nonfinancial firms, but it stops well shortofpermittingbanks toholdmixeddebt-