By relaxing the rules governing bank holding companies, the Federal Reserve is trying to pump more private equity into the banking system.
But there is a debate over whether that is such a good idea.
The rule changes announced in September let private-equity investors own up to 33% of a bank's stock without having to register as a bank holding company, though no more than 15% can be voting stock. These investors are also now allowed to have board representation.
Former Texas banking commissioner Cathy Ghiglieri said banks could wind up attracting investors with little banking industry experience who might be inclined to push banks into riskier lines of business in order to maximize profits.
"Venture companies want a specific return — high multiples in a short period of time," she said. "This isn't the industry for that."
Ashton Ryan, the president and chief executive officer of the $700 million-asset First NBC Bank Holding Co. in New Orleans, said the Fed's decision opens the door for commercial firms to buy big stakes in banks.
"I'm not against commercial enterprises buying into banks as long as they stay passive," he said. "When you get up to 33%, that is having too much ownership. To say it is nonvoting stock is just a game. Ultimately, they are going to play a role in the bank."
T. Alan Harris, the principal in Houston's Harris Law Firm PC, is less troubled by the Fed's actions. Previous restrictions on bank holding company ownership often prevented private-equity investors from buying stakes in community banks, he said, because they needed to do bigger deals to make it worth their effort. If investment groups become bank holding companies, then they must divest themselves of investments in other industries, he said, and most are unwilling to do that.
Mr. Harris said he believes banks should be welcoming private-equity investors because they bring a "fresh perspective."
Of course, regulators must be selective about which groups they let invest in banks.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are allowing nonbanks and private-equity groups to bid on failed or troubled banks. Julie L. Williams, the OCC's first senior deputy comptroller and chief counsel, said her agency will vet an investment group seeking a failed bank as it would anyone seeking a bank charter.
Carla Brooks, a managing director at Commerce Street Capital LLC, can attest to that. She recently helped a group get the first shelf charter from the OCC, and she said the review process was no different than it is for banks in organization.
"They wanted the exact same information and asked the exact same questions," she said. "They have to have complete confidence in who they are approving."