Private equity investment in banking organizations a policy review of regulatory responses to the financial crisis of 2008

The financial crisis of 2008, a result of the 2007 subprime mortgage crisis and theensuing credit crunch, wreaked havoc among financial institutions in the United States and beyond. As a result, the health of these institutions have significantly deteriorated, increasing the risk to their counterparties and creating dramatic uncertainty in financial markets. The broader economy has entered into a recession as a result of this crisis, and bold regulatory action has been taken to help mitigate this crisis. One such effort by authorities has been to update existing regulatory policies surrounding the enforcement of the Bank Holding Company Act, which limited private equity investment in banking organizations. The purposes of this research project are (1) to analyze the regulatory responses taken in order to facilitate private equity investment in banking organizations, (2) to examine potential ways private equity and banking organizations might work together, as demonstrated by the private equity industry's record of success and by examining case studies of private equity investments in banking organizations, and (3) to draw conclusions as to the potential future of such investments and the effectiveness this will have on the banking industry. This thesis begins by providing background information on the credit and financial crises followed by a discussion of the potential impact of the crises on banking organizations. I then examine banking organizations' needs for capital and the potential role private equity investors might play provided policy changes. Next, I give a more detailed account of the specific provisions of the regulatory restrictions limiting private equity investments in banking organizations and alternative ways private equity firms have made investments in banking organizations. I then provide an analysis the revised policy statement. Next, I discuss further measures by federal regulators that would facilitate and provide some potential safety measures for private equity investments in banking organizations. I offer case studies of past private equity investments in banking organizations to foreshadow the potential ways private equity and banking organizations can work together under a more conducive regulatory framework. I speculate as to the future of private equity investment in banking organizations. Lastly, I present conclusions the role private equity investment might play in the troubled banking industry and the effectiveness of regulatory policy responses in this regard.