FDIC Proposes New Rules for Bank DealsThe board of the Federal Deposit Insurance Corp. (FDIC) on Thursday voted to ask for comment on a proposal that would set higher limits for private equity firms purchasing failed banks. Under the proposal, private equity investors that would want to buy any failed banks would be limited from lending to investors and investment funds, and would have to make sure the new bank remained well capitalized. (Read the memo)
The FDIC proposal calls for investors to attain and keep capital levels at the acquired bank -- a minimum 15% Tier 1 leverage ratio for at least three years. The proposal also would put other restrictions on ownership changes and where credit could be extended.
The proposal states "Investors will be expected to cause the depository institution to maintain sufficient capital such that it will be at a level no lower than "well capitalized" during their ownership."
Under the proposed policy statement, the FDIC would establish standards for bidder eligibility in connection with the resolution of failed insured depository institutions, which provide for:
- capital support of the acquired depository institution;
- agreement to a cross guarantee over substantially commonly owned depository institutions;
- limits on transactions with affiliates;
- maintenance of continuity of ownership;
- clear limits on secrecy law jurisdiction vehicles as the channel for investments;
- limitations on whether existing investors in an institution could bid on it if it failed; and disclosure commitments.
"How investments in insured depository institutions are structured is critical for the banking system as well as the FDIC," says FDIC Chair Sheila Bair. "We are particularly concerned with the owners' ability to support depository institutions with adequate capital and management expertise. This proposed policy statement is intended to provide those essential safeguards. We are trying to find the best way to have a balanced approach, and we look forward to comments that can help us accomplish that."