The remaking of Wall Street

Paper examines how private equity firms mirror investment banks in power and influence

Private equity firms are more financially stable and pose less systemic risk to the global economy than the large investment banks that went defunct during the financial crisis of 2007-09, finds a new analysis by a financial regulation expert at Washington University in St. Louis School of Law.

Tuch

“Private equity firms are structured and funded in ways that may address the basic shortcoming that led to investment banks’ downfall — specifically, the use of short-term debt to fund longer-duration assets,” said Andrew Tuch, professor of law and author of “The Remaking of Wall Street,” forthcoming in the Harvard Business Law Review.

Tuch argues that, in the face of onerous post-crisis reforms, Wall Street has evolved to displace investment banks with more financially resilient institutions.

“Importantly, however, ongoing changes in private equity firms’ broker-dealer activities raise systemic concerns that require active regulatory monitoring,” Tuch said. “There are systemic and financial stability concerns arising from the funds that these firms manage, particularly their hedge and credit funds, about which little detailed information is publicly available.”

Reforms proposed under the Trump Administration to soften bank holding company regulation will affect the competitive environment for private equity firms with uncertain effect, Tuch said.

Could they grow to become a problem similar to the investment banks in the collapse 10 years ago?

“What is clear is that as private equity firms continue to evolve, and especially if their broker-dealer activities grow further, the parallels with the former investment banks will suggest greater danger and therefore demand a more robust regulatory response,” he said.

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