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Private equity has been searching for a way to increase their investment in struggling financial institutions in the US and it looks like they have come up with an answer. Last week private equity claimed that the existing banking regulations would have to change if they were to increase investment in banks. Now the large private equity firms are claiming they may not need the regulations altered as they have found a way around them.

Banking regulation currently restricts investors with greater than 24.9% stake in a bank from owning other companies. This is to prevent a bank owner from funding its other investment companies through the bank. Investment firms which own more than 25 % of a bank are subject to all banking regulation. Under these regulations controlling investors are accountable for the unlimited liability of a bank’s loss. Private equity firms have been deterred from investing in banks because of these banking regulations.

Private equity firm JC Flowers has found a way around the regulation that restricts ownership of other companies when owning greater than 24.9% of a bank. Chairman of the firm Christopher Flowers has discovered that he can set up a fund in his own name, which has no ties to other funds, to avoid the regulation on ownership. The independent fund would be granted the right to buy a controlling stake in a bank. Other private equity firms are also considering new ways to invest in struggling financial institutions.



UNI Global Union is gravely concerned about this sort of financial engineering to get around regulation. Private equity’s typical short term view of investment is not the sort of investment we want penetrating our banks, particularly the struggling ones. We are in the midst of a financial crisis that has been allowed to occur due to a lack of regulation. It is clear that there is still a need to tighten regulation to stop this type of exploitation occurring.

To read more: http://www.ft.com/cms/s/0/91e106e0-64a8-11dd-af61-0000779fd18c.html