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New York: Regulators are looking at easing rules to help private equity firms take stakes in US banks, in a move that may not be a long-term solution, but could provide a near-term boost to the ailing sector.
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 firms like Carlyle Group are pushing regulators to loosen the rules.
But private equity firms typically invest limited amounts of capital for fin-ite 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's 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 last week that US banks may need to raise $65 billion 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 $120 billion already raised by US banks, Goldman said.
Few candidates
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, new accounting rules 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 $820 billion of available funds in 2007.
Getting more capital from private equity firms won't necessarily be a positive for existing shareholders.
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