Fed loosens rules for investing in banks.

[SirNitram]

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WASHINGTON (Reuters) - The Federal Reserve on Monday relaxed some rules regarding minority shareholder investments in banks, in a move that could encourage investments by private equity and other firms.

The eagerly awaited guidelines bring greater clarity to defining limits for investors that want to buy sizable stakes in banks, but do not want to own so much of a bank that they are subject to U.S. banking regulations.

The new rules do not represent a dramatic change from the past, but are likely to attract fresh capital to the sector at a time when there is dire need for it, said Chip MacDonald, a mergers partner at the law firm Jones Day.

"The Fed is evolutionary not revolutionary, and this change reflects that," MacDonald said.

Key changes in the guidelines include allowing an investor to buy up to a 15 percent voting stake instead of the previous 9.9 percent limit. Investors can also buy up to 33 percent total equity interest, including voting and non-voting shares, instead of the 25 percent prior limit.

The guidelines also clarify and expand the number of board seats that a minority investor can have, MacDonald said.

In a statement, the Fed said it had "reexamined its precedent in this area and ... believes that a minority investor generally should be able to have a single representative on the board of directors ... without acquiring a controlling influence."

The Fed also outlined circumstances in which a minority investor might have two seats on a bank's board without being seen as wielding control over management.

It said that minority investors should be able to lobby bank management on issues like dividend policy and pay, without being deemed by the Fed to have overstepped the boundary that would get them directly regulated.

The Fed has long maintained a tight leash on banks and required extensive disclosure of their activities, to help keep the banking system stable.

Banks are seen as crucial to the economy. Regulators are looking to prevent commercial businesses from gaining too much control over banks and potentially misusing them.

Private equity firms are increasingly looking to help bail out the banking system, but do not want to buy such large stakes in banks that they become regulated bank holding companies. Being such a company could hinder a private equity fund's stakes in other businesses, such as manufacturing.

Regulatory concerns have prevented many private equity firms from buying stakes in banks. Earlier this year, TPG Capital LP TPG.UL bought a stake in Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) and Corsair Capital LLC led a cash infusion for National City Corp (NCC.N: Quote, Profile, Research, Stock Buzz).

Last month, Randal Quarles, managing director at Carlyle Group CYL.UL, one of the world's largest buyout firms, said he expected many of the investments buyout shops make in the sector will be minority stakes -- which can be accomplished without dramatic changes in the Fed's rules.

Standard Conservatism: Less and less regulation, more and more power in the few.