Efforts to recapitalise the US banking system have entered a new stage as a group of mutual funds and hedge funds led by Corsair Capital, a little-known private equity firm, prepare to put between $7bn (£3.5bn) and $8bn into National City (NYSE: NCC - News) , the tenth-largest bank in the US.

The deal is expected to be announced on Monday, according to people familiar with the matter.

The recapitalisation follows unsuccessful efforts to sell the bank, which has long been the focus of takeover speculation.

Like many other regional lenders, National City, based in Cleveland, Ohio, has been hard hit by losses in its mortgage portfolio. The bank reported a $333m fourth-quarter loss.

The Corsair-led group clinched the deal involving the ailing bank after many of the largest private equity firms, including Blackstone Group and Kohlberg Kravis Roberts, dropped out early in the process.

The winning group has little of the safeguards and governance rights that private equity firms usually require.

It is buying common stock, has the right to put only one director on the board and has no control, these people add.

"These are investment trades, not control trades," says the co-founder of one leading private equity firm that looked briefly at the deal very early in the process. "And because they don't have control, they don't have to pay a premium."

The National City deal comes weeks after TPG led a $7bn capital infusion into Washington Mutual, the largest savings and loan association in the US and shortly after Wachovia announced plans to raise $7bn from existing shareholders. Once TPG developed a template, it became easier for other deals to be done and bankers expect that more arrangements will follow. Other Ohio banks may be in that group.

This is the second rescue finance wave of this cycle and in each big wave, private equity has found stiff competition.

The first wave saw Wall Street firms receive rescue finance from sovereign wealth funds rather than from private equity and now the public seems to be offering more attractive terms than private equity in the second wave.

One reason that the major private equity firms did not bid more aggressively for National City is timing. Many executives at leading private equity firms say that it may still be too early.

Additional reporting by Ben White