FDIC Private Equity
FDIC Proposes Strict Guidelines for Private Equity
The Federal Deposit Insurance Corp proposed tough guidelines for private equity firms to buy failed banks. The FDIC announced Thursday a plan that calls for private equity groups to meet strong capital requirements and commit to long-term investments, in order to purchase the collapsed banks.
The proposal requires private equity groups to consistently maintain strong capital in the banks, “specifically a Tier 1 leverage ratio of 15 percent, for three years. They would also generally have to maintain the investment in a bank for three years.” Additionally, private equity groups must provide a “contractual cross guarantee,” in which a firm that owns two banks allows the healthier institution to provide aid for the weaker. Private equity groups would also be discouraged from lending credit to their own investment funds, affiliates or portfolio companies. Furhermore, private equity groups owning banks would need to major disclosures about their ownership structure, giving regulators greater insight as to who is running the investment.
Bank regulators on the FDIC’s board argued openly over the guidelines with some officials saying that such tough measures will only scare off private equity investors, a much-needed source of capital for troubled banks. While alternative investors may be the saving grace for the banks, as traditional sources of capital have failed to rescue them. But bank regulators are nervous that allowing private equity groups to buy banks may be less secure than with traditional investors that are subject to strict regulation by the SEC.
Yet other regulators, like Comptroller of the Currency John Dugan feel that opening up to private equity investors will help the banks. He says, “I do fear that the current articulation of the proposal has standards that go too far. There is real money and real capital that can provide savings to the deposit insurance fund.” On the other side of the fence are those who defend the strict guidelines, like FDIC Chairman Sheila Bair. She argued that the requirements are necessary for ensuring the stability of the banks but admitted, “I’m not sure we have it right here, but we do have a solid document.”
Private equity firms have already started to move into the banking sector. Carlyle Group, Blackstone Group (BX.N), WL Ross & Co. and Centerbridge Partners decided to invest $900 million toward rescuing Florida’s BankUnited.
Quotes from Reuters
Tags: Private equity banks, private equity FDIC, private equity investing in banks, alternative investments in banks, banking regulation, FDIC Regulation private equity, buyout FDIC banks