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July 2, 2008 > Fed eyes making it easier to invest in banks

Fed eyes making it easier to invest in banks

By Jeannine Aversa, AP Economics Writer

WASHINGTON (AP), Jun 27 _ The Federal Reserve is looking into making it easier for private equity firms to invest in banks, a move that could usher new capital infusions to cash-hungry banks and help them cope with credit problems.

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been encouraging banks to raise more money to rebuild balance sheets that have been hit by billions of dollars in losses from bad investments in mortgage-backed securities.

A global credit crisis and financial turmoil have made it increasingly difficult for banks, Wall Street firms and other financial institutions to line up capital.

The Fed is considering taking steps that would help give private equity firms a better understanding of what they can and cannot do as they weigh making an investment in a bank.

``We are looking at ways we can make those things more workable and gain from the experience we've had over the past few years,'' said Scott Alvarez, the Fed's general counsel.

Private equity firms, which put together massive pools of money to invest, can take stakes in banks now. However, the Fed has gotten a lot more questions from private equity firms and others recently about how large a stake they can take without being subject to regulatory supervision.

Under federal law, an investment of 25 percent or more in a bank would trigger Fed regulations. Over the years, the Fed has generally found _ when reviewing individual cases _ that investments of under 10 percent don't constitute a ``controlling interest'' in the bank and thus don't trigger regulatory oversight.

That's left a gray area _ the treatment of potential bank investments that would be between 10 percent and under 25 percent.

For several years, the Fed's legal staff has been looking into this matter. No decision is imminent, but some clarity could be made later this year. It's unclear how this would be done _ through guidance from the Fed, changes in current rules or some other method.

The Fed's possible action was first reported by The Wall Street Journal.

The newspaper reported that J.C. Flowers & Co., Carlyle Group, Kohlberg Kravis Roberts & Co. and Warburg Pincus were among those meeting with Fed officials on the matter.

In an opinion piece Thursday in The Wall Street Journal, Randal Quarles and Olivier Sarkozy, managing directors at the Carlyle Group, made the case for leeway. ``Private equity is ready and willing to step forward in large amounts _ restoring lending capacity, encouraging efficiency and protecting the taxpayer,'' they wrote. ``The Federal Reserve and other banking regulators can help remove obstacles to this important pool of capital.''

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