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

Abstract

This paper investigates the role of private equity (PE) in failed-bank resolutions after the 2008 financial crisis, using proprietary Federal Deposit Insurance Corporation failed-bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show that PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors played a positive role in stabilizing the financial system through their involvement in failed-bank resolution.