FDIC may ease private equity buys of failed banks
WASHINGTON — Federal regulators appear ready to temper proposed restrictions on private equity firms seeking to buy failed banks, as the government seeks to lure more potential purchasers amid a mounting tally of collapsed financial institutions.
The Federal Deposit Insurance Corp., which proposed the new policy last month, is expected to make the changes when its board meets on Aug. 26 and publicly adopts final guidelines, people familiar with the issue said Thursday.
Private equity firms, which generally buy distressed companies and then resell them after about three to five years, would face strict capital and disclosure requirements under the FDIC proposal.
Seventy-seven banks already have failed this year amid rising loan defaults spurred by tumbling home prices and spiking unemployment, costing the deposit insurance fund — which is financed by assessments on U.S. banks — billions of dollars. The FDIC, which seizes the banks and seeks buyers for their branches, deposits and soured loans, has said the private equity industry can play a valuable role in injecting sorely needed capital into the banking system.
Still, FDIC Chairman Sheila Bair said the proposed restrictions were intended to provide “essential safeguards” in light of concerns over private equity firms’ ability to apply adequate capital and management skill to banks they buy. “We are trying to find the best way to have a balanced approach,” Bair said in early July when the policy was opened to public comment.
FDIC spokesman Andrew Gray declined to comment Thursday on what action the agency might take on the guidelines.
Industry interests say the FDIC proposal tipped the balance in a way that discourages private equity firms from buying banks. And two of the FDIC board members — Comptroller of the Currency John Dugan and John Bowman, acting director of the Office of Thrift Supervision — warned publicly that it may be overly restrictive.
The regulators “are interested in anything that can help them get rid of failed banks and failed banks’ assets,” said Chip MacDonald, an attorney at Jones Day in Atlanta whose clients include some private equity firms.
But the FDIC policy in its current form “doesn’t fly economically” for private equity buyers, he said.
Lawrence Kaplan, a former senior attorney at the Office of Thrift Supervision, said it’s an interesting dilemma for the FDIC. “Chances are they’re going to temper that,” he said.
The most notable requirement is for private equity investors to maintain a robust amount of cash in the banks they acquire, keeping them at a minimum 15 percent capital leverage ratio for at least three years. Most banks have lower leverage ratios — a key measure of financial strength that gauges an institution’s capital divided by its assets. Banking giant Citigroup Inc., for example, had a reported ratio of around 9 percent as of June 30.
That mandate could be reduced to 10 percent or lower in the final rules, some people familiar with the discussions said. Kaplan suggested that instead of a 15 percent minimum, the required ratio should vary based on an assessment of the risk profile of a particular bank.
Also under the proposed policy, investors would have to own the banks for at least three years and face limits on their ability to lend to any of the owners’ affiliates. That ownership period could be substantially reduced in the final guidelines, some experts say.
The biggest bank failure so far this year came last Friday, when the FDIC took over Colonial BancGroup Inc., a big lender in real estate development based in Montgomery, Ala. The agency sold the bank’s $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.
Colonial’s failure is expected to cost the deposit insurance fund an estimated $2.8 billion. Colonial was roughly twice the size of BankUnited FSB, a Florida thrift closed in May with $13 billion in assets, which was sold for $900 million to a group of private-equity investors— including the firm run by billionaire investor Wilbur Ross — in a rare transaction of that type by the FDIC. The expected hit to the insurance fund from BankUnited is an estimated $4.9 billion.
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