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— Media Maneuvers —
Heavy restrictions would be imposed on private equity buyers attempting to acquire failed banks under a policy proposed by the board of the Federal Deposit Insurance Corp. The FDIC's plan would ban some ownership structures proposed by prospective PE buyers, would prevent banks from being flipped for a quick profit and would impose capital requirements on newly refinanced, healthy banks similar to those demanded of troubled institutions.
The PE industry and bankers are up in arms over the proposal, and there's a good chance that provisions will be softened before it is implemented. Two of the three regulators who sit on the five-member FDIC board voiced reservations about the plan's specifics. Behind the scenes, bankers and government officials grumble that FDIC Chairwoman Sheila Bair, who is championing the plan, would be encroaching on the turf of other regulators. Typically, the FDIC's main role in resolving banking failures has been to determine which bid would allow depositors to be made whole at the least cost to the insurance fund. Buyers' eligibility requirements lay with other regulators such as the Federal Reserve Board and the Office of the Comptroller of the Currency. Bair's plan would require PE investors to maintain a 15% Tier 1 capital level for three years after acquiring a failed institution. Although the FDIC requires purchasers of failed institutions to maintain 8% Tier 1 capital, banks acquired by PE investors would be treated as undercapitalized if the capital level falls below 15%, and the lender would be subject to prompt corrective actions by regulators, which could include having to raise more capital, limit asset growth, avoid new lines of business and, in some cases, cap interest paid on deposits and limit transactions with affiliates. The FDIC also is examining whether PE funds should be considered a "source of strength" and therefore be ordered to provide new capital if the acquired institution's financial condition worsens. Also alarming to would-be investors: The FDIC is considering a cross-guarantee that would require PE investors to surrender a sufficient portion of ownership interests in other depository institutions to cover costs to the FDIC's deposit insurance fund if the acquired bank gets into trouble again. John Dugan, comptroller of the currency, and John Bowman, director of the Office of Thrift Supervision, both members of the FDIC board, supported soliciting comment on Bair's plan, but only to get the ball rolling on rules for PE rescues. However, they said the plan must be reworked before either could support a final policy. Bowman called the proposal "very troubling" and said his agency will file its own comments. "I take great comfort that it is only proposed," he said as the plan was unveiled at the FDIC's July 2 public meeting. Dugan agreed that guidelines for PE purchases of failed banks are needed. However, "you can also swing the pendulum too far in the other direction," he said. "It's great to have safeguards but not if they completely deter people from investing." At a time when recapitalizing the banking industry is critical, he said PE investors have "real money and real capital that can create real savings to the Deposit Insurance Fund." Tom Vartanian, chair of the financial institutions transactions group at Fried, Frank, Harris, Shriver & Jacobson LLP, says it's laudable the FDIC is trying to establish a policy for letting PE firms rescue banks, but by setting "higher hurdles at every step," regulators risk chasing PE buyers away. Kevin Petrasic, of counsel in the financial services group at Paul, Hastings, Janofsky & Walker LLP, said implementing a policy that discourages PE buyers could hinder the FDIC's obligation to resolve bank failures at the least cost to the Deposit Insurance Fund. "The very notion of this proposal seems to be inconsistent with that concept," he says. Bair acknowledged the proposal's contentiousness but said that some PE offers have made it difficult to determine where control of the bank lay. Some offers spelled out that would-be buyers planned to sell the bank for a quick profit. "There is a legitimate issue here," she said. "We want to make sure these nontraditional investors ... are doing so at an appropriate level of capital commitment and are willing to serve as a source of strength and are committed to providing banking services on a longer-term basis." Bill McConnell is The Deal's Washington bureau chief. |
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