Regulators in the US are looking at easing rules to help private equity firms take stakes in US banks which could provide a near-term boost to the ailing sector but not in the long-run.
The US Federal Reserve is considering adjusting current rules that generally make it hard for investors to buy more than 9.9 per cent of a bank's shares without seeking permission from regulators. Private equity companies such as Carlyle Group are pushing regulators to loosen the rules.
But private equity firms typically invest limited amounts of capital for finite periods, which may not be ideal for a bank looking to assure depositors of its strength. "Bank regulators like stable money," said Gregory Lyons, chair of the financial services group and banking practice at law firm Goodwin Procter.
However, banks are in dire need of capital, and in some cases they need it fast. That is where private equity can help – they can quickly provide capital for five years or longer. In the meantime, the economy can improve, allowing banks to improve their financial footing, and other investors may step in to buy out private equity funds. "The Fed is looking for a pool of capital to help become the shock absorber during this interim period," said Paul Lee, head of the banking practice at law firm Debevoise & Plimpton in New York.
Goldman Sachs analysts said earlier that US banks may need to raise $65 billion (Dh238.5bn) of additional capital to cope with mounting losses from a global credit crisis that will not peak until 2009. That would be on top of the estimated $120bn already raised by US banks, Goldman said.
There are few obvious candidates to provide this capital. Sovereign wealth funds have been burned by their investments in banks like Citigroup, which have so far turned out to be losers, at least on paper. And sovereign wealth funds are more interested in well-known global banks than second-tier US regional and community banks.
And while previous cycles have seen stronger banks acquiring weaker ones, accounting rules that went into effect earlier this decade make those deals less likely now. Private equity firms, meanwhile, have large pools of capital they can draw on. Private Equity Intelligence, an industry publication, said there were $820bn of available funds in 2007.
Getting more capital from private equity firms will not necessarily be a positive for existing shareholders.
"When private equity firms come in, they will not be gentle. They want to get paid for taking the risk," said Adam Compton, co-head of global financial stock research at RCM, which manages some $150bn of assets.
National City Corp sold $631m of common shares in April to a consortium led by private equity firm Corsair Capital. The shares were sold at a 40 per cent discount to their prior closing level.
The Fed is likely to make it easier for private equity firms to take more than 9.9 per cent stake in a bank, but the law makes it difficult to take more than a 24.9 per cent stake without becoming a bank holding company, experts said. "The Fed can change things at the margin, but it can only go so far, because the law is the law," said BJ Sanford, a banking consultant at Promontory Financial Group.
The Number
$65bn: Goldman Sachs said that US banks may need to raise as much as this amount as additional capital to cope with losses from the credit crisis