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Private Equity and Financial Stability

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at 17 KM
University of Luxembourg Follow

• Stock exchange
• Finance
• Bank

Evidence from Failed Bank Resolution in the crisis

This paper studies the role of private equity (PE) in stabilizing the financial system in the crisis.
Using detailed and proprietary failed bank data from the FDIC combined with information on pe
investors, We provide some of the first evidence on PE's involvement in acquisition and resolution
of failed banks during the crisis. PE acquisitions accounted for nearly a quarter of all failed bank
assets acquired in the crisis between 2009 and 2014. We find that PEs typically acquire
underperforming banks that are riskier than bank-acquired banks. Further, PE failed bank
acquisitions are in areas where the neighboring banks were also in distress, and hence had lower
ability to acquire. PE-acquired failed banks recovered better than those acquired by banks,
measured Using the ability to maintain branch operations and deposit growth, despite being
underperforming ex ante. Our evidence is consistent with an interpretation that PEs stabilize the
financial system in crisis by providing capital to failed bank resolutions and complement bank
acquirers by filling the capital gap left by under-capitalized banks.