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Lighter regulation would allow banks to return as LPs
Banking regulators recently announced new rules, effective in October, that will allow banks to invest in venture capital funds. These arrangements had been barred by the “Volcker Rule,” which was put in place after over-leveraged banks caused a global financial crisis in 2008. A statement by the National Venture Capital Association praised the change and predicted a “significant impact on entrepreneurial capital formation … particularly in emerging ecosystems.”
The deregulatory announcement comes on the heels of two pieces of news that seem to support the Volcker Rule’s original purpose: the U.S. Federal Reserve Board deciding to restrict banks’ capital plans following stress tests; and, conflict-of-interest complaints over SoftBank investments in Credit Suisse’s working capital funds (as well as the firm that manages those funds), which have made loans to four SoftBank-backed companies.
Regardless of the implications of the rule change for the broad economy, venture development organizations should be aware of a potential new class of limited partners for their funds.