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THE ECONOMICS OF THE PRIVATE MARKET

Banks as Issuers of Equity

The private placement market appears not to be an important source of equity capital for U.S. banks. Table 17 lists the private equity issues of U.S. banks during 1990-91 that appear in the IDD Information Services data base. ¹⁶⁰  U.S. banks issued about $2 billion of equity in the private placement market during 1990-91, but $1.25 billion was in a single placement of convertible preferred stock by Citibank with a foreign investor.  Only twelve individual issues appear on the list, and several of the issuers are relatively well known and presumably could issue in the public markets without great difficulty. During this period the number and total volume of issues by foreign banks was also not large (table 18). ¹⁶¹

The legal separation of banking and commerce in the United States may be one reason banks do not issue much private equity. The Bank Holding Company Act of 1956, the amendments of 1970 to that act, and Federal Reserve Board rulings prevent nonbank corporations from owning or controlling banks or bank holding companies. Acquisition of more than 5 percent of the voting stock of a bank or bank holding company requires Federal Reserve Board approval. As appendix B notes, most private equity is purchased by institutional investors, especially pension funds, which tend to take large blocks of individual offerings.  When a purchase would amount to more than 5 percent of a bank's total capital, costs of obtaining regulatory approval would reduce the issue's attractiveness for purchasers.

In general, the private equity market appears to serve, directly or indirectly, mainly those start-up or other high-risk issuers that promise high returns. Such returns compensate investors for the illiquidity and monitoring costs associated with private equity. As a mature and highly regulated industry, banking may be unattractive to such investors.

17.  Private placements of equity by U.S. banks, 1990-91

1. The Citicorp and Manufacturers Hanover issues were of convertible preferred stock and were Rule 144A issues.  Details of the other issues are not known.

Source.  IDD Information Services.

18.  Private placements of equity by foreign banks, 1990-91

Source.  IDD Information Services.

160. No issues of equity by savings and loans appear in the data base for this period.

161. The tables are surely an incomplete representation of banks' issuance. The method by which IDD collects information (voluntary reporting by agents) favors the reporting of larger transactions assisted by relatively high volume agents. Many small transactions likely are missed.

Banks as Issuers of Debt