Out of Control Policy Blog

FDIC Tightens Rules for Buying Failed Banks

Private equity investor John Kanas predicted 1,000 banks would fail in America over the next two years. On an interview with CNBC yesterday, Kanas said, "We’ve already lost 81 this year. The numbers are climbing every day. Many of these institutions nobody’s ever heard of. They're smaller companies."

Kanas's group bought BankUnited in Florida earlier this year, and is certainly eyeing more bargains. New FDIC rules may make it more complicated to do this though. On Wednesday, the FDIC voted 4-1 to pass new, stricter rules for groups that want to buy failed banks from the FDIC. The rules were softer than one's previously suggested though. The New York Times reports:

Private-equity controlled banks will now have to meet a minimum capital requirement of 10 percent of all assets, sharply lower than that 15 percent level under initial consideration but still twice the minimum levels for traditional banks.

The F.D.I.C. also dropped a requirement that the private equity firms supply additional capital in the event of a severe downturn, a rule that was fiercely opposed by the industry. The agency will review the impact of new rules after six months.

The FDIC is walking a tight rope between wanting to ensure that the recapitalization of banks doesn't fall apart, and ensuring that tougher rules don't drive away investment. The FDIC, understandibly, doesn't want to sell a bank to a private equity group only to have to take it back into receivership in two years after mismangement. However, it doesn't help if banks can't be bought from the FDIC in the first place:

By softening its stance on private equity, the F.D.I.C. is hoping to turn up additional buyers and reduce the number of failed banks that its insurance fund will have to support. But the new rules may fall short in encouraging a flood of participation.

Instead, they appear intended to encourage private equity firms to team with existing banks, rather submit bids themselves — formalizing much of what has become the agency’s standard operating policy.

NYT reports that regulators have only allowed a few banks to be purchased by private equity, IndyMac Bank being the most prominent. (WaMu and Wachovia had sales worked out before they fully taken into receivership.) Time will tell if the new rules create too many problems for Kanas's group and others.

I've written about the FDIC rules more here and here.

Anthony Randazzo is Director of Economic Research


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