FDIC Reconsidering Proposed Limits to Private Equity Investment in Banks

Last week, I wrote about a new FDIC proposed rule that would restrict how private equity could investment in failed banks. The proposal would require investors “to maintain certain capital levels at the acquired bank—a minimum 15% Tier 1 leverage ratio for at least three years—and would put other restrictions on ownership changes and where credit can be extended.” However, private equity firms quickly balked at the idea. Now the FDIC has backed off its proposal. Trade groups like the Private Equity Council warned that the proposed rules would discourage investment of the $400 billion or so that is available.

Given the sharp negative response, the FDIC has considered backing down. Bloomberg News reports that “One compromise under discussion is requiring private- equity-owned banks to maintain a Tier 1 capital ratio between 8 percent and 15 percent, depending on the FDIC’s evaluation of the lender’s management, business plan and projected return on equity, the people familiar with the talks said.”

The reason for the FDIC’s proposal is that the regulator is concerned “private investors may not be committed to the long-term ownership of a healthy bank and that allowing some firms into the market could just result in future bank failures.” FDIC chairwoman Shelia Bair has said, “We are particularly concerned with the owners’ ability to support depository institutions with adequate capital and management expertise.”

Ultimately, the more difficult regulators make it for investors to buy failed banks, the longer the financial institutions will sit as a drain to the FDIC, and the less time those banks will have to make a positive impact on the economy.