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Fed May Ease Rules on Private Equity Bank Stakes: WSJ

Reuters
Thursday, 26 Jun 2008 | 5:32 PM ET

The U.S. Federal Reserve is considering steps to make it easier for private-equity firms and others to invest in banks, the Wall Street Journal reported on Thursday, a move that could open the door to more capital for cash-starved banks.

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The Fed is expected to offer more clarity about what exactly outside investors can and can't do when they want to acquire sizable stakes in financial institutions but avoid direct regulatory supervision, the Journal said in a report on its website, citing regulators and other people familiar with the matter.

"We are looking at ways we can make those things more workable and gain from the experience we've had over the past few years," Federal Reserve general counsel Scott Alvarez told the paper.

Federal Reserve officials were not immediately available to comment on the report.

Any easing of obstacles to private equity firms making sizable investments in banks could be a catalyst for cash infusions. That has the potential to relieve some of the pressure on lenders, many of which need to shore up balance sheets amid the worst banking crisis in decades, the paper said.

Banks have raised money from government investment funds, mutual funds and other investors, often through public offerings of stock or other securities.

There are indications that the capital pool is starting to dry up at a time when many financial institutions are still bleeding.

Fed officials recently have met with big buyout firms, including J.C. Flowers, CarlyleGroup, Kohlberg Kravis Roberts and Warburg Pincus, and banking lawyers to discuss the obstacles, according to people familiar with the matter.

In an opion article in Thursday's printed edition of the Journal, Carlyle directors Randal Quarles and Olivier Sarkozy, said private equity firms stand ready to invest in the bank sector should the restrictions get eased.

Under federal law, to own more than 24.9 percent of a bank, an entity must register as a bank holding company, which is subject to heavy regulation and can be forced to serve as a "source of strength" for the bank, the Journal said.

Ownership of more than 9.9 percent of a bank also subjects the entity to regulatory scrutiny to ensure that it isn't controlling—or even influencing—the bank's operations.

The Fed can't change those laws, but it has room to maneuver in how it interprets them.

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