The Federal Reserve is considering making it easier for private equity firms to take large stakes in banks, without being subject to existing restrictions and commitments, as part of efforts to encourage capital-raising in the troubled US financial system.
In the past 20 years, some lawyers say the central bank has been increasingly onerous in its interpretation of congressional rules triggered by purchases of bank stakes larger than 24.9 per cent.
Under pressure from buy-out groups such as Carlyle, keen to pour money into US banks but unhappy with limitations on investments by groups other than “bank holding companies”, the Fed is considering some changes, say sources close to the debate. However, the discussions are preliminary and nothing is imminent, they say.
A Fed spokesman said: “We are looking at ways to make things more workable.”
As the financial crisis approaches its first anniversary, banks and investment banks have continued to seek fresh sources of capital to make up for losses associated with the declining values of mortgage-related assets. So far, banks have raised about $400bn, but economists and fund managers estimate the hole on bank balance sheets may be as large as $1,300bn. “The regulators should have the flexibility to come up with the least-cost solution,” said Samuel Golden, a former official at the Office of the Comptroller of the Currency, who now heads Alvarez & Marsal’s financial advisers.
While the first wave of fundraising efforts was led by sovereign wealth funds from Asia and the Middle East, these groups have recently appeared less inclined to put money into the US financial system.
As the appetite from abroad wanes, US buy-out groups have stepped into the fray, as shown by the TPG-led capital infusion into Washington Mutual, and Corsair Capital’s investment in National City.
Nevertheless, bank investments by private equity groups are subject to significant limitations, designed to avoid control of financial institutions by unregulated entities. In particular, groups that are not “bank holding companies” are not allowed to own 25 per cent or more of a bank, and if they hold a board seat, they are restricted to holding less than 10 per cent of a bank. In addition, regulators require buyers of controlling bank stakes to make“source of strength” commitments to put up additional funds if necessary.
Private equity firms are reluctant to provide such open-ended commitments that could put their funds and their investors at risk – a factor that led Blackstone to walk away from its deal to buy Alliance Data.
One solution that may be considered would allow buy-out firms to create separate vehicles for their bank investments. Olivier Sarkozy and Randal Quarles, two senior Carlyle executives, expressed dissatisfaction with these limitations in an article published on the Wall Street Journal website on Thursday, saying they were “far stricter than necessary”.
They said: “Private equity is ready and willing to step forward in large amounts – restoring lending capacity, encouraging efficiency, and protecting the taxpayer. The Federal Reserve and other banking regulators can help remove obstacles to this important pool of capital.”