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

66 Pages Posted: 20 Apr 2021

See all articles by Emily Johnston Ross

Emily Johnston Ross

Federal Deposit Insurance Corporation (FDIC)

Song Ma

Yale School of Management; National Bureau of Economic Research (NBER)

Manju Puri

Duke University - Fuqua School of Business; NBER

Multiple version iconThere are 3 versions of this paper

Date Written: April 17, 2021

Abstract

We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural” potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.

Keywords: Private equity, Financial stability, Failed banks, Financial crisis

JEL Classification: E65, G18, G21

Suggested Citation

Johnston Ross, Emily and Ma, Song and Puri, Manju, Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis (April 17, 2021). Available at SSRN: https://ssrn.com/abstract=3828789 or http://dx.doi.org/10.2139/ssrn.3828789

Emily Johnston Ross

Federal Deposit Insurance Corporation (FDIC) ( email )

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Washington, DC 20429
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Song Ma (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://faculty.som.yale.edu/songma/

National Bureau of Economic Research (NBER) ( email )

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Manju Puri

Duke University - Fuqua School of Business ( email )

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United States
919-660-7657 (Phone)

NBER

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United States

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