Event

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

  • Conférencier  Manju Puri – Duke Fuqua School of Business

  • Lieu

    University of Luxembourg Metz/Nancy Room 29 Boulevard J.-F. Kennedy L-1855 Luxembourg

    LU

  • Thème(s)
    Finance

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.