Sheila Bair gets it right

July 2, 2009

FDIC Chairman Sheila Bair last month told a US Senator her agency would “get it right,” in coming up with a set of rules to govern private equity investments in failed banks. And it appears that’s what Bair has done.

The FDIC’s new proposed guidelines on PE investments in failed banks are tough and smart. The new regulation should discourage the worst of the PE crowd only interested in making a quick buck by taking on the deposits and assets of a failed bank.

Most notably, the proposal would require PE firms to well capitalize the banks they control. The new banks would have to maintain a Tier 1 capital ratio of 15% for at least 3 years. That’s a very high regulatory capital ratio–given that most banks maintain Tier 1 ratios between 6% and 10%.

The FDIC also would bar the PE buyers from selling or transferring their ownership interests for at least 3 years. That’s intended to prevent PE firms from getting bank assets on the cheap and then flipping them.

These regulations may deter some PE firms. But the rules shouldn’t be a problem for any PE firm that is serious about running a bank.

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