Banks: The New Frontier?

Yesterday's The Wall Street Journal's Deal Blog had an interesting post (paid subscription required) on the formation of private equity funds, structured as bank holding companies, whose goal is to do that voodoo that they do so well, but this time to the banking "business."

Banking is one of the most fragmented industries in the U.S., with the number of lenders reaching into the tens of thousands. For that reason, and because combining banks can yield big cost savings, it would seem the perfect area for private-equity firms to target. But there’s always been one problem: regulation.

With the $25 billion leveraged buyout of Sallie Mae, and with private-equity firms boldly going to places they rarely went before, that may be about to change.

From our colleagues at LBO Wire, we learn that CapGen Capital Advisors, a new private-equity firm, plans to raise as much as $1 billion for bank and other financial company acquisitions. To get around regulations that have scared away other private-equity firms, CapGen is structured as a bank-holding company, according to the story. 

CapGen, which was formed last year by former Bankers Trust vice chairman and U.S. Comptroller of the Currency Eugene Ludwig, is not alone in testing the banking waters. As the story points out, others including Vulcan Capital, the investment firm of Paul Allen, the billionaire of Microsoft fame, recently formed a joint venture with Bankers’ Capital Group to buy regional banks in the Southeast.

The LBOWire story on CapGen is found here.

Also of interest is the back-and-forth from two commenters to the post over the short supply of risk managers, compliance officers, and commercial lenders. I'd add to that list "BSA officers."  As to  commercial lenders, one commenter asserts that it's been the consolidation in the industry that's prompted commercial lenders who've been "laid off" to charter new banks (a trend frequently noted on this blog), rather than move laterally to an existing bank, and that further consolidation will only enhance this wave of new charters.

A couple of thoughts off the top of my head (and on Bank Lawyer's Blog, it's always best to avoid drilling too deeply into the abyss): (1) further consolidation should make it easier for the consolidated organizations to rationally, and more economically, handle risk, compliance and BSA management, although more new banks means more need for people with those skills, and (2) with more smaller banks, the problem of compliance management will increase. Service providers who come up with the most affordable outsourced compliance management solutions for community banks should have a growing market. The key term is "affordable," which may leave many (most?) law firms out of the running.