We all know that it is hard for small businesses to get financing these days from banks – it was never a piece of cake, and now that the credit crunch is on for so long we see it has gotten ridiculous. But… did you ever wonder what a bank does when it needs financing? Yes, banks need money too! In fact, banks don’t just give you a hard time when you want a loan because they are unsure if you’ll default — they sometimes just don’t have the money.
Lenders, especially small ones, struggle regularly to find investors. This is in part because of federal regulations placing restrictions and rules on investors who invest in a lending institution. Basically, if a private equity fund (or other investment entity) owns 9.9% or more of a bank, then they are required to do special reporting and subject itself to regulatory scrutiny. Beyond that annoyance, in order to own more than 24.9% of a bank, an entity has to register as a “bank holding company” and must be a “source of strength” for the lending institution.
To say the least, these can be big deterrents to investors considering investing heavily in a bank — when combined with the uncertainty about the future of lending, this makes for a shaky proposition for a bank in search of cash. If the bank doesn’t have cash, it can’t lend you or your business any either!
It was recently reported in the Wall Street Journal that officials from the Fed have been meeting with various buyout firms to brainstorm issues and solutions which they face when considering investing in a bank. If they succeed in finding a way to reinterpret /re-legislate the current laws, then more private equity firms may be able to invest in banks. The real question is: given the current lending crisis, will any one will want to invest, even if the red tape is cut?