During the financial crisis that began in 2007, there were a large number of bank acquisitions by private equity firms. This was due to the poor financial health of the banking sector due to overlending and the obligation for the FDIC to insure the banks' previous losses. Regulation was thus put in place as many of these banks operated on the regional level, and the Federal Reserve was concerned about the risky investment choices of private equity and its effects on local communities.
Background
The financial crisis that began in 2007 was the result of overlending, specifically that of subprime mortgages. Banks were able to lend to individuals and families with little ability to pay in the long term, due in part to the price of the home in question as well as the aggressively variable interest rates of the mortgage. However, lenders worried little about the chances of default, as these subprime mortgages were sold off to investment banks who would in turn repackage them as complex financial instruments. When the crisis took its course, however, banks were uneasy lending further amounts of money, as they were unable to continue selling mortgages to investment banks, which in turn lowered their profits. This was coupled with the falling levels of deposits held by these banks.
Interest From Private Equity
A private equity firm is a group of investors who pool their wealth into the acquisition of various assets, including existing businesses such as banks. These firms have a commitment to invest a certain amount of money on a periodic basis to satisfy their investors. During the financial crisis, many of the failing businesses were that of banks, especially those on the local and county level. Private equity firms saw the large profit potential of acquiring such companies. Specifically, they saw that they were able to inject the required amount of capital in failing banks, which in turn would induce such banks to begin lending once again. Furthermore, private equity firms assumed that the FDIC would assume any losses caused by the banks' previous management.
Private Equity Buyouts
A number of banks, often small, were acquired by private equity firms during the financial crisis. These included Santa Ana Business Bank and First Commerce Bank, which was acquired by GrandPoint Capital in 2010. Sterling Financial Group was acquired by Warburgh Pincus LLC and Thomas H. Lee Partners, IndyMac was taken over by J.C. Flowers and Pacific Capital Bankcorp was acquired by Ford Financial Fund, all in the same year.
Regulations
In 2009, The FDIC became concerned about the large number of bank acquisitions by private equity firms. This was due to the increasing number of failed banks, the obligation for the FDIC to handle any previous banking losses and the ability of private equity firms to manage their new acquisitions. As a result, the FDIC stipulated that private equity firms cannot take full control of failed banks. Private equity firms manage comparatively large sums of investor cash and are known to take relatively risky investment decisions. Restrictions on ownership are thus designed to limit the possibility of a deeper financial crisis.
