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

67 Pages Posted: 11 Aug 2021

See all articles by Manju Puri

Manju Puri

Duke University - Fuqua School of Business; NBER

Emily Johnston Ross

Federal Deposit Insurance Corporation (FDIC)

Song Ma

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

Multiple version iconThere are 3 versions of this paper

Date Written: April 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

Puri, Manju and Johnston Ross, Emily and Ma, Song, Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis (April 2021). FDIC Center for Financial Research Paper No. 2021-04, Available at SSRN: https://ssrn.com/abstract=3901997 or http://dx.doi.org/10.2139/ssrn.3901997

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

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NBER

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Emily Johnston Ross

Federal Deposit Insurance Corporation (FDIC) ( email )

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Song Ma

Yale School of Management ( email )

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New Haven, CT 06511
United States

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

National Bureau of Economic Research (NBER) ( email )

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