Fed relaxes limits for PE investment in banks

The US Federal Reserve has relaxed rules on sizeable minority investments in US banks by allowing private equity groups and other firms to take up to 33% of voting and non-voting shares in banks, up from the previous 25% limit.

The move by the Fed comes at a time when the US government is seeking to shore up the US financial system and prevent the failure of even more banks and other financial institutions that hold sub-prime mortgage-backed assets on their books.

Private equity groups, which have a lot of equity but are finding debt expensive to raise, are searching for alternative places to park their investors’ cash, while the economic environment has become much more difficult to do mega LBOs.

The Fed is also permitting minority investors to increase the number of board seats that they can have with a bank.

The new guidelines effectively clarify how large a stake a private equity fund could buy in a bank without it having to subject itself to US banking regulations.

This week, US Treasury Secretary Hank Paulson and US Federal Reserve Chairman Ben Bernanke, have been trying to persuade the Democrat-controlled US Congress to pass a US$700bn plan to bail out US banks and the global financial system.

Both Republicans and Democrats are, however, seeking to water the plan down in an attempt to protect the US taxpayer.