F.D.I.C. Eases Some Rules for Buying Banks

Facing a dearth of traditional bank buyers, the board of the Federal Deposit Insurance Corporation moved Wednesday to relax some of its proposed rules while still imposing tough standards on private equity firms seeking to acquire troubled financial institutions. In a 4-1 vote, the F.D.I.C. board tried to strike a compromise between the industry’s need for more capital and worries that non-bank buyers might take excessive risks and put the industry’s deposit insurance fund in jeopardy. The final rulessoften the F.D.I.C.’s original proposal by allowing buyout firms to set aside a smaller cushion of capital to protect against losses than was first proposed.

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

The F.D.I.C. also dropped a requirement that 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.

Sheila C. Bair, the F.D.I.C.’s chairwoman, and three other directors of the five-member panel voted in favor of the revisions, saying that they struck the right balance between competing policy objectives.

John D. Bowman, the head of the Office of Thrift Supervision, cast the lone dissenting vote, citing a lack of evidence that the rules would protect the insurance fund.

“I am not a fan, or proponent, of private equity, but it is hard to know whether the restrictions are required,” Mr. Bowman said.

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 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 than submit bids themselves — formalizing much of what has become the agency’s standard operating policy.

So far, regulators have only allowed a few groups of private equity firms to take over failed banks, including IndyMac Bank of California and BankUnited of Florida, with assurances that experienced bankers would run the operations. The new rules will only apply prospectively.

The revisions follow weeks of lobbying from the private equity industry, which claimed that the agency’s initial proposal placed them at a competitive disadvantage.

But the vote also reflects regulators’ concerns about whether there are enough traditional buyers to handle an expected wave of bank failures. Many strong traditional banks are busy digesting acquisitions they made last fall, while weaker institutions have their hands full with burgeoning losses. So far, 106 banks have failed since the beginning of 2008, saddling regulators of billions of dollars of toxic assets and depleting its once-flush deposit insurance fund. The fund had about $13 billion at the end of the first quarter, down from about $52.8 billion a year earlier. And the pace of new bank failures is quickening.

The F.D.I.C received more than 60 comments from private equity firms, law firms and consumer advocacy groups. Banking regulators attempted to strike balance between shoring up the industry’s finances with fresh capital and new types of buyers, while avoiding lax rules that might once again encourage excessive risk-taking. Regulators kept in rules that required private equity firms to hold onto their investments for at least three years as well as restrictions barring buyout firms from lending to affiliated companies.

Officials feared that private equity buyers might be more prone to gamble on riskier loans in order to bolster their returns or use the banks they control to finance their operations. Regulators have also been concerned that private equity buyers would quickly unload their bank investments if they do not turn a quick profit.

But they dropped the so-called “source of strength requirement” from the final regulations. Traditional investors must agree to serve as a so-called “source of strength” for the bank and pump in additional money if its prospects sour. Private equity firms have stringent restrictions on their ability to put their firm’s other investments at risk and claimed the rule would make bank deals impractical.

“I regret we couldn’t get unanimity, but this is really a tough issue,” Ms. Bair said.

As the failures pile up, the new private rules are only one part of the agency’s strategy. Regulators have also been trying to lure traditional bank buyers with lucrative loss-sharing deals, where the government agrees to shoulder the bulk of the losses on a failed bank’s riskiest loans in exchange for the acquirer selling off those assets.

They have also been testing a program to that would provide financing to encourage private investors to purchase toxic loans from failed institutions, which might bid up asset prices.

And F.D.I.C. officials recently proposed what amounts to a melding of the two strategies. Regulators have said they might carve up failed banks into “good” and “bad” pieces, encouraging healthy banks to snap up the “good” assets with a loss-sharing agreement while leaving the most troubled assets for vulture buyers.


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