Private equity doesn’t always enjoy a good rep. Sometimes equated with ‘house flipping,’ the industry often raises concerns about its long-term impact, especially on essential services like health, elder care facilities, prisons, and more.
Now, consider if private equity entered the banking industry. Imagine a financial crisis leading to hundreds of local banks declaring bankruptcy: Suddenly, small businesses are scrambling for credit and neighboring banks — usually the ones who would naturally absorb their peers that have gone out of business — are also on the brink and can’t take on more risk.
Would it bother you if private equity (PE) companies came to the rescue and bid to acquire the failed banks?
“The question is very controversial in banking: ‘Do you let non-banks do banking?’” said Professor Manju Puri of Duke University’s Fuqua School of Business. “Walmart, for example, applied multiple times for a license, but did not get one.”
The issue is even more contentious with private equity, an industry often criticized for placing debt burdens on target companies, for its excessive risk-taking, and for focusing on immediate profits at the expense of the firm’s long-term performance.
In a paper published in the Journal of Finance, Professor Puri and co-authors (Emily Johnston-Ross of the Federal Deposit Insurance Corporation [FDIC] and Song Ma of Yale School of Management) examined a similar scenario during the 2008 financial crisis, when almost 500 banks failed — leading to about $70 billion of losses for the Federal Deposit Insurance Corporation (FDIC) fund.
Studying proprietary FDIC data, the researchers found evidence that the PE acquisitions of failed banks had positive effects on local economies, potentially saving further losses for the FDIC, and accelerating the recovery of areas hard hit by local branch bankruptcies.
The FDIC guarantees the depositors of insured banks that they will get their money back (up to a certain limit), even when banks fail. When an insured bank becomes insolvent, the FDIC generally takes control of the bank (“receivership”), until it is sold to a healthier bank.
The goal is to facilitate a quick resolution with the least possible losses for the FDIC fund.
But during the financial crisis, the pool of potential buyers had shrunk, as many larger banks were also struggling.
In such circumstances, U.S. policymakers and the FDIC began making it easier for PE companies to participate in failed-bank auctions — a policy innovation at that time, as private investors were generally excluded from bidding because they were not chartered banks themselves.
“The FDIC was hiring thousands of temporary workers to help in the resolution of failed banks. There was limited capacity to take over and manage failed banks,” Puri said. “So they needed to get more buyers into the pool.’”
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The primary method the FDIC used between 2009 and 2014 to resolve bank failures was a sealed-bid auction to sell assets and liabilities of the failed banks.
The researchers examined FDIC bidding and acquisition data, including details of the bidding companies and bid prices.
Puri and colleagues wanted to measure how banks acquired by private equity (PE) firms performed after the takeover and compare that with banks acquired by other traditional banks. To do this fairly, they first needed to identify a group of banks that were very similar, so they could see the impact of being managed by either a PE firm or another bank in the years following the acquisition.
The researchers first selected a group of banks that both PE companies and other banks had bid for (signaling that they were attractive to both bidders). They then narrowed down this sample to those banks won by a slim margin between winning and losing bids, ensuring that both a PE bidder and a bank bidder had placed a similar valuation on the failed bank (this step was crucial because given that PE companies often targeted the least healthy banks, examining the post-acquisition performance of all banks without this control would have skewed the experiment.)
This selection process generated a comparable sample of banks, either won by PE companies or by other banks, similar in asset size, capital ratio, types of loans and so on.
Armed with this comparable sample, Puri and colleagues went on to measure how these banks performed post-acquisition. The results pointed to overall positive effects of private equity interventions:
Interested in observing whether PEs or banks had claimed differently, the researchers aggregated the amounts claimed and paid out by the FDIC. After controlling for the fact that private equity usually acquires less healthy banks (hence incurring higher rates of unrecoverable loans), they found no meaningful difference in the loss claims between PEs and regular banks.
The study showed that PE companies held the failed banks for an average of 6.5 years, before selling them or making them public through an IPO. Usually, the researchers noted, PEs sell the bank to another local bank.
“They were sold back to the neighboring banks who were their natural buyers but who were financially constrained at that time,” Puri said.
Professor Puri — who has also been serving as a senior advisor at the FDIC’s Center for Financial Research — said private equity helped fill a gap that was challenging for an undercapitalized banking sector. They did so by acquiring the riskiest branches, those with the highest chances of being liquidated and causing losses to the FDIC and — ultimately —to the taxpayer.
A “ballpark” calculation led the researchers to believe that the PE intervention may have saved the FDIC more than $3.5 billion in losses, by helping more than 50 banks avoid liquidation (or acquisition by a lower bidder, which would also mean less money back to the FDIC).
In addition, PE’s acquisitions spared local communities a host of other economic damage, Puri said.
“If PEs hadn't come in, these banks wouldn't be there to serve the community, which means that all the people they employed wouldn't be there and small businesses wouldn't receive credit,” she said. “And it's extremely hard then for small firms to be able to get credit elsewhere.”
Should we let private equity get into the banking business? According to Puri, the evidence of this paper supports a positive answer.
“Private equity companies are often considered the bad guys. People worry that they come in, they're stripping down these banks, they make a quick buck, and everyone else is poorer,” she said. “But when a banking crisis happens, you have to make policy responses on the fly, and you don't necessarily have research to back it up.”
“And our research tells you that private equity intervention in failed banks can be a good thing, during a financial crisis.”
First Published: Dec 16, 2025, 17:48
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