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Bernanke: private equity 'good source of capital' for banks

The Fed chairman is joined by US Treasury Secretary Paulson before Congress in supporting private equity investments in banks.

Federal Reserve Chairman Ben Bernanke yesterday praised private equity as a “very good source of capital” for banks suffering liquidity problems in testimony before the House Financial Services Committee.

Responding to questions about the recent spate of private equity in the financial sector, Bernanke said, “On private equity, I agree with [Treasury Secretary Hank Paulson] that we are looking for banks and other financial institutions to raise capital. Private equity is a very good source of capital.”

Bernanke’s sentiments were echoed by Paulson.

“Both of our organisations have encouraged financial institutions to recognize losses and to raise capital, because capital is available and that is a much better alternative than shrinking their balance sheets,” he said.

The Fed is reportedly considering changing regulations that make it difficult for non-banks (like private equity firms) to take meaningful stakes in bank holding companies. In his testimony, Bernanke pushed for a clarification of a key regulatory hurdle concerning the ownership limits private equity firms can acquire in banks, saying the Fed is “looking at what constitutes effective control”. Current Fed rules set the hurdle for the definition of “control” as low as 10 percent.

Private equity stakes in major US banking franchise have become a hot-button issue, as equity infusions such as the one made by TPG into retail banking giant Washington Mutual have generated considerable political attention.

Opponents of the trend worry that private equity firms may be more inclined to engage in more reckless behavior to satisfy the demands of their limited partners, possibly endangering the health of the financial institutions they own.