Banks are beginning to shake off eight years of financial cobwebs that have gummed up potential mergers, acquisitions and a variety of other transactions. A number of new rules will require domestic and foreign institutions to attract new capital, dispose of assets, sell or create new subsidiaries and affiliates and set up new domestic holding companies.

With all of these changes and more on the horizon, it is an opportune time for federal bank regulators to reevaluate control rules and the restrictions on minority investments in banks and bank holding companies. Revising the current rules could make more capital from private equity, hedge funds and other institutional investors available to banking institutions.

The size and terms of investments in banks are dictated by a variety of Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency rules, many of them unwritten. As a practical matter, actual voting or economic control of a company occurs at levels often well above various regulatory control thresholds, which can arise when an investor owns more than 4.9%, 9.9%, and 24.9% of a single class of voting stock. Certain investments may exceed 24.9%, reaching as much as 33% of the total equity of a bank without triggering a control presumption if they include non-voting and other regulatory-friendly features.

While some of these thresholds are mandated by statute, others may be interpreted or modified by the regulators. This gives regulators ample flexibility to adapt the rules to changing environments without diminishing the protections afforded by the Bank Holding Company and Change in Bank Control statutes.

If an investor, either alone or in concert with others, ends up controlling a bank, the investor will be treated as a bank holding company. That is a result almost no private equity, hedge fund or institutional investor can accommodate, given the capital requirements and activity limitations that accompany bank holding company status. Control thresholds also play a role in determining how and whether investors may subsequently conduct shareholder proxy contests, avoid sister-bank liability obligations, join technology consortiums and joint ventures, and engage in transactions with banking companies in which they invest.

At a time when capital is king, banks need to obtain more of it. To that end, "control" should at least be uniformly interpreted by the three federal bank regulators. It is not. Uniformity would at least be a step forward in structuring non-controlling investments that may utilize non-voting, debt and convertible security instruments, as well as puts, calls, and options.

The FDIC's 2009 Statement of Policy on Qualifications for Failed Bank Acquisitions, and the Federal Reserve Board's 2008 Policy Statement on Equity Investments in Banks and Bank Holding Companies, in particular, set forth important interpretations of control rules with regard to private capital. Unfortunately, these interpretations have discouraged private equity, hedge funds and other institutional investments in financial institutions.

The effect may be intentional. But since those investors have demonstrated that they are willing to put their money at risk and play by the rules, even if that means subjecting themselves to stricter requirements, extra hurdles now seem unnecessary. Indeed, when the FDIC adopted its 2009 Statement of Policy, its board committed to reevaluate the impact that it would have within six months. That reevaluation does not appear to have ever happened or been made public.

Registered mutual funds, which are subject to strict regulation and oversight by the Securities and Exchange Commission under the Investment Company Act, have also run into some of these same problems. For example, they are generally subject to the same control and acting in concert rules as other investors, despite their unique structure and passive investment mandate. While there is a "fiduciary exception" built into the control rules, that exception has not been uniformly construed or applied. As a result, a significant amount of potential bank capital from registered investment companies has remained on the sidelines.

We review every bank enforcement action, and we have yet to see any recorded instances of significant enforcement or supervisory actions involving investments by private capital investors for violations of either written or unwritten principles. Frankly, these investors were asked to abide by an even higher standard than others, and it appears that they have done so. Indeed, scrupulous compliance is the only option that such investors have, since the stakes are so high for them and their reputations if they do not. That makes private capital investors among the most reliable and safest a regulator could ask for.

When the Change in Bank Control Act and holding company rules were enacted or revised in the 1970's and 1980's, we worked on drafting or implementing those regulations at two different agencies. At the time, there were no private equity or hedge funds to figure into the mix. The mutual fund industry was still in its infancy, and the capital and banking markets were quite different from what they are today. There was no interstate branching, no global banks and, in some states banks were permitted to have only one branch.

Times have changed. Before the next round of bank M&A — or recapitalizations and failed bank acquisitions — it would be well worth it for regulators to revisit the original purpose of control and holding company rules. The regulatory trial period for private equity and hedge funds has lasted for seven years. That's long enough. Their record of compliance warrants strong consideration for the removal of the hurdles thrown in front of them. Such a change may attract more capital into banks, thereby softening the blows of the next financial crisis.

Thomas P. Vartanian is chairman of the financial institutions practice at the international law firm Dechert LLP. He is a former general counsel of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. and special assistant to the chief counsel at the OCC. David L. Ansell is a partner in the financial institutions practice at Dechert and a former attorney with the OCC.