Private Equity Investors Helped Stabilize Failed Banks During the Financial Crisis

Private equity firms have attracted plenty of criticism. These investors typically buy private companies and overhaul their operations to boost profits. But some people argue that PE investors’ maneuvers, such as loading these companies with a lot of debt, introduce risk into the financial system.

The question of whether PE firms help or hurt the economic system is too big to answer comprehensively, says Song Ma, an assistant professor of finance at Yale SOM. But in a recent study, his team zeroed in on one example of PE involvement: when PE investors bought banks that failed during the 2008 crisis, a period when “financial stability is extremely important and also extremely fragile,” Ma says. “We are looking at a very high-stakes moment.”

The researchers found that PE investors tended to acquire banks in poorer health that traditional buyers—that is, other banks—didn’t want. And they seemed to do a reasonably good job of turning these failing banks around. Banks purchased by PE firms fared better than those bought by other banks on measures such as keeping branches open and lending to small businesses.

“They know how to run distressed and risky assets,” says Ma, who collaborated with Emily Johnston-Ross at the Federal Deposit Insurance Corporation (FDIC) and Manju Puri at Duke University on the study. The bank resolution evidence suggests that “they could play a quite positive role in stabilizing the financial system during that specific period.”

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