Tuesday, September 23, 2008

Fed to Private equity; please invest in banks

WASHINGTON -- The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks.

It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. Regulators have grown worried about a shortage of capital at banks, in particular smaller thrifts and regional institutions. The Fed has been crafting this policy for at least two years, and private-equity firms have been aggressively lobbying for more lenient policies.

Monday's move should encourage private-equity firms, government investment funds and others to buy stakes in banks, transferring capital from those that have it to those that need it. Previously, if the Fed determined that a private-equity firm had a controlling stake in a bank, it could classify the investor as a "bank holding company," directly supervise the parent firm and impose restrictions on outside investments. The rules were designed to prevent investors from abusing their bank stakes to benefit their nonfinancial investments.

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