June 26, 2008 / 10:18 PM / 12 years ago

UPDATE 1-Fed mulls clarifying bank ownership rules

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WASHINGTON, June 26 (Reuters) - The U.S. Federal Reserve is considering clarifying rules that govern what constitutes a controlling interest in a bank, a Fed official said on Thursday, a step that could pave the way for more private equity investment.

“We are looking at ways we can make those things more workable and gain from the experience we’ve had over the past few years,” Federal Reserve general counsel Scott Alvarez said.

The review was first reported in the Wall Street Journal.

Private equity firms have been seeking ways to invest in U.S. banks and thrifts while avoiding restrictions that bar owners of these institutions from other businesses.

The Fed has reached out to a number of firms, including the Carlyle Group, to get a better handle on what obstacles are created by their current rules and to find ways to make it easier for private equity firms and others to invest in banks, a private equity executive said.

“What is really driving this is this environment and problems they face,” said Randal Quarles, managing director with the Carlyle Group, and previously the under secretary of the Treasury for domestic finance.

Quarles said Carlyle met with the Fed about a month ago.

As bank stocks sink and leveraged buyout deals dry up amid the global credit crunch, private equity firms are eyeing investments in the financial sector. Financial institutions globally have raised hundreds of billions of dollars worth of capital to offset massive credit losses and are likely to need more.

But big investments from private equity have been few. A controlling stake in a bank or thrift brings with it regulatory oversight, capital requirements and restrictions on the nature and scope of businesses activities.

Reluctant to give in to such oversight but attracted to the sector, private equity shops are exploring various deal structures that would allow them to make larger investments in banks and thrifts — and even own some — without the whole firm coming under regulatory purview. (Reporting by Mark Felsenthal and Rachelle Younglai; Editing by Jan Paschal)

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