Fed rule on bank ownership only goes so far

The Federal Reserve has relaxed bank ownership rules.

But senior private equity executives said that while the move was a step in the right direction and helpful, it did not give buyout firms the control positions they normally seek when acquiring assets.

“The Fed has loosened rules on investing in banks so you can have a higher percentage, but you still can’t have control,” says Gary Talarico, managing director at private equity firm Sun Capital Partners.

“We’re control investors and not controlling a financial institution has given us pause,” says Talarico, speaking at the Reuters Restructuring Summit in New York last week.

The U.S. Federal Reserve has long maintained a tight leash on banks and required extensive disclosure of their activities, to help keep the banking system stable. But changes the Fed announced include allowing an investor to buy up to a 15% voting stake instead of the previous 9.9% limit. Investors can also buy up to 33% total equity interest, including voting and non-voting shares, instead of the 25% prior limit.

The Fed also outlined circumstances in which a minority investor might have two seats on a bank’s board without being seen as wielding control over management.

“Realistically, it makes it much easier for private equity to lead a recapitalization, that’s the key,” says Howard Newman, president and CEO of New York-based private equity firm Pine Brook. “Private equity’s role here is to validate the value of the bank and to lead the recap and this makes it easier because you can play a larger role.”

But Newman says that while this addresses one problem, it was not the fundamental ones facing the financial industry.

“It’s a very good and constructive step that will help bring private equity to the table to validate the rest of the solution,” he says. —Reuters