The FDIC: An IMterview with Heidi Moore
Heidi Moore has a good story today about the banks winning the FDIC lotto and being allowed to take over the assets and deposits of other, failing banks. But I was left wanting more, especially when it came to her conclusion, so I took to IM:
Felix Salmon: You write “The FDIC’s pool of buyers—large or small—is getting tapped out” and that “as many buyers as the FDIC can find, it is not likely to be anywhere as many as it needs”.
Can you tell me a bit more about that?
Heidi Moore: Yes, definitely.
Felix Salmon: Once someone like Stearns takes over a bank, does that make it harder to take over another?
Heidi Moore: First, there is the expectation by many that bank failures will be higher in ’10 than they were in ’09. So the sheer numbers will be more.
Felix Salmon: If the sheer numbers just stayed constant, and the number of failures in 2010 stayed at 2009’s high level, would there still be a problem?
Heidi Moore: Yes
Felix Salmon: Are 2009’s buyers tapped out, as it were?
Heidi Moore: “Tapped out” is extreme. but they’re closer.
The FDIC has a mail list of about 400-600 banks or so that it contacts whenever a bank is coming up for auction.
These banks are chosen due to their strongish capital ratios
Felix Salmon: And that list more or less sufficed during 2009
Heidi Moore: Yes, although there were a handful of banks that simply didn’t get sold
Felix Salmon: But sometimes the capital ratios take a ding when a failed bank is taken over?
Heidi Moore: Yes, exactly. Every time you buy a failed bank, even if the FDIC is guaranteeing the assets, there are still some bad loans that need to be covered by adequate capital. There are few banks that can maintain high capital ratios to cover their own losses as well as the losses of more acquisitions.
And the FDIC is always checking in on them. For instance, they can’t apply the profit from an acquisition toward the capital ratio.
Felix Salmon: So it’s rare-to-never that an acquiring bank comes out of one of these deals with a capital ratio as good or stronger than when it went in.
Heidi Moore: There are enough repeat buyers that it’s not impossible. But yes, a hit is inevitable.
Felix Salmon: Which means that there’s basically a finite pool of excess capital at those 400-600 banks, and the FDIC is slowly depleting that pool.
Heidi Moore: Not “depleting” because the FDIC doesn’t sell unless the bank has proof that its cap ratio will bounce back.
Stearns, for instance, has a tier one ratio of something like 17%, and it has made 5 acquisitions.
Felix Salmon: Has its capital been depleted at all by those acquisitions?
Heidi Moore: This is why the stock-warrants plan is so great; banks can buy FDIC banks without handing over cash that could hurt the capital ratio.
Felix Salmon: So this is why I’m confused. If Stearns can buy banks without hurting its capital ratio, then why can’t it continue to do that more or less indefinitely?
Heidi Moore: The expectation of the FDIC is that the capital ratios will take a hit. That’s the risk inherent in the acquisition. So FDIC tries to mitigate it by offering loss-sharing, warrants, etc. There’s only so many times they can go back to that well, though, which is why they’re opening the door to private equity now.
I actually saw a FDIC document where they said “we’re running out of buyers”.
Once the IMterview was over, Heidi got a statement from the FDIC saying that “We are still seeing first-time buyers, and in the few cases when we can’t find a buyer for a failing bank, it is usually due to the make up of the failed bank’s deposits.” So it’s a bit unclear whether or not the FDIC is actually running out of buyers or not. But it’s certainly something that the FDIC should be worried about: it makes intuitive sense that if the FDIC only has a few hundred qualified buyers, and the number of bank failures is continuing to rise, then eventually it might run out of buyers. But whether that means that private-equity shops will finally be given the opening they’re looking for remains to be seen.