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

Emily Johnston-Ross, Song Ma, & Manju Puri

Abstract

Using proprietary failed bank acquisition data from the FDIC combined with information on private equity (PE) investors, we argue that PEs took a positive role in stabilizing the financial system in the crisis through their resolution of failed banks. We show PE acquisitions were economically important, accounting for a quarter of all failed bank assets acquired in the resolution process; PEs acquired underperforming and riskier failed banks, focusing on and providing complementary capital in areas where the local potential bank acquirers were themselves distressed. Using a quasi-random empirical design, we investigate subsequent performance and effect on the local economy. We find PE-acquired banks performed better, and that this, in turn, benefited local economic recovery. Our results support a positive role of PEs in the crisis in failed bank resolution.