Federal Reserve May Ease Buy-Out Rules

In an effort to support capital-raising efforts, the Federal Reserve is considering making it easier for private equity firms to take large stakes in banks. Firms taking large stakes in banks would not be subject to existing restrictions and commitments, according to the Financial Times.

Buy-out groups, such as Carlyle, have been pressuring to put money into U.S. banks but have not been satisfied with limitations on investments. A Fed spokesperson said to FT, “We are looking at ways to make things more workable.”

Banks and investment banks have sought fresh sources of capital to make up for mortgage-crisis related losses. Banks have raised approximately $400 billion, but economists and fund managers estimate the deficit might be as large as $1,300 billion. “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, according to FT.

Bank investments by private equity groups are subject to significant limitations. These strict rules are to avoid control of financial institutions by unregulated entities. Groups that are not “bank holding entities” are not allowed to own more than 25 percent or more of a bank. If they have a board seat, they are restricted to holding less than 10 percent of a bank.

Buy-out firms are seeking to create a separate vehicle for their bank investments, allowing them to move forward without the heavy limitations.