When Banks Collapse

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When Banks Collapse

Following the wave of bank failures in the Great Depression, regulators decided that bank ownership should be limited to bank holding companies.

Why? Back then several banks failed when owners diverted resources to prop up other holdings like retailers and manufacturers. With 305 banks on the verge of collapse today, regulators have begun to relax the rules. Now the Federal Reserve will let a single private equity firm own as much as 33% of a bank. Firms can team up to buy an entire bank.

Critics fear private equity firms--which collectively own hundreds of companies--will succumb to the same temptation as bank owners in the 1930s. "If I've got a bank, and I have a business that's going down, where do you think the bank funding is going?" says Rochdale Securities bank analyst Dick Bove.

When private equity stumbles, small business and taxpayers will end up footing the bill.

Watch for a future posting on this leadership blog for how a small business was forced to provide an interest-free and unsecured loan to an entity caused by one failing bank's moves prior to being acquired. Be sure you protect your personal and business assets by banking with a safe U.S. financial institute.