Lowering the Cost of Bank Recapitalization

Abstract

Efforts to recapitalize banks in the current crisis have to date been focused on government assistance under the TARP, rather than private investment, and on bank holding companies, rather than banks. We describe three alternative or complementary approaches designed to lower the cost of bank recapitalizations by drawing in funds from the private sector and focusing on banks: rights offerings, debt restructurings, and FDIC-assisted bridge banks. Each approach was used in dealing with problem banks in the 1990s; each can be pursued without additional legislation; and each is worth considering now. We also propose two legal changes that would assist bank recapitalization: (1) the Fed should further modestly relax its rules under the Bank Holding Company Act to eliminate the presumption of "control" by investors at the current threshold of 5%, which would permit more capital to be invested in banks by private equity and other institutional investors; and (2) Congress should consider a new statute to streamline the recapitalization of bank holding companies by moving them outside current bankruptcy laws into a new resolution regime similar to the FDIC regime currently used for banks.

Keywords: Bailout, banks, bank holding companies, TARP, workout, bankruptcy, bank regulation, solvency, restructuring, rights offering, recapitalization, bridge bank, open bank assistance

JEL Classification: E5, E53, G2, G21, G28, G3, G32, G33, G34, G38, H8, H81, K2, K23, L5, L52