Why private equity firms should enter banking sector- Robin Trehan

Due to regulatory
issues, private equity firms have been unable to fully enter the banking
sector. This is due to the fact that the Federal Reserve prohibits such firms
from owning majority stakes in banks.

However, in light of the
current economic situation, it is clear that this type of regulatory
interference no longer makes sense. Thus far, the government’s response to the
banking crisis has been cleary inadequate. Banks across the nation continue to
close their doors. The FDIC website lists over 70 banks that have failed in the
first half of 2009 alone, and the trend show no sign of stopping.

Even if it did prove
effective, a governmental “bail out” of banks is an unnatural way to try and
fix the problem. It is a stop-gap measure that runs contrary to the normal
function of the market. The tactic is unpopular with many Americans, and for
good reason. Allowing private equity firms the freedom to participate in the
banking sector makes much more sense. It would provide a much more effective
long-term solution while at the same time avoiding negative perception from
taxpayers.

Banks fail due to lack
of capital. Private equity firms have access to around $1 trillion in cash and
these companies have made their interest in the banking sector clear. For
example, some firms have tried to circumvent the Fed’s regulations by working
together. Each one of a group of firms purchases a small position in a bank
with none holding a majority stake.  

There’s no reason to
force private equity firms to jump through such hoops. When all the factors are
taken into account, it just doesn’t make sense for the government to prevent
these two sectors from establishing a mutually beneficial relationship.
Creating a regulatory environment that makes it easy and effective for private
equity firms to provide banks with the capital they need is an obvious win for
both sides, and for the economy as a whole. The Federal Reserve needs to
revisit the relevant regulations and modify them in a way that encourages,
rather than discourages, private equity investment in the banking sector.

Robin Trehan is
management and financial expert.www.LatestBusinessReport.com