Fed

Federal Reserve opens door to more bank investments

The Federal Reserve Bank is liberalizing U.S. bank ownership rules to make it easier for foreign investment and private equity funds as well as other nonbanking businesses to take ownership stakes.

The Fed’s decision will bring more capital to struggling U.S. banks, but also means more foreign businesses and sovereign wealth funds will own a piece of U.S. banks, said David Kenny, an attorney and financial expert with the Squire Sanders & Dempsey LLP.

Kenny said decades-old bank rules limited what nonbanking entities could invest in U.S. banks. Such investments likely will come from countries such as China, Singapore and oil-rich areas in the Persian Gulf, Saudi Arabia and Russia, but most may wait until the market hits bottom, he said.

The decision also opens the door to nonbanking businesses. Wal-Mart Stores Inc., for example, has been looking to get into the financial services business.

“Investors can now, without becoming subject to the strict limitations of the Bank Holding Company Act, take larger stakes and have more board seats and communicate with management more freely than before,” Kenny said.

Ownership is now capped at 33.33 percent, up from 25 percent, board seats are capped at two. The Fed action comes as the central bank and U.S. Treasury Department try to save the U.S. financial sector and Wall Street from what some fear is a dramatic collapse.

The Fed has been pumping money into financial markets and is working with Congress on a $700 billion bailout plan.

“Capital will flow more freely to banks, helping them cover the capital lost in writing down the value of the various types of mortgage-backed and asset-backed securities which, due to their low quality and market-to-market accounting rules, have depleted bank capital,” Kenny said.

(Published by Business Journal - September 26, 2008)