Financial Regulatory Forum

US agency to vote Aug 26 on private equity rules for failed banks

August 19, 2009

By Karey Wutkowski

WASHINGTON, Aug 19 (Reuters) – The Federal Deposit Insurance Corp will meet next week to vote on its policy for private equity investments in failed banks, according to an agenda posted to its website. The FDIC proposed the private equity guidelines in July. Investors and some regulators criticized them as too harsh.

FDIC Chairman Sheila Bair defended the strict proposals, saying strong capital requirements and other provisions should be imposed to ensure the safety and soundness of the banks.

But she also said she was open to industry input on whether the guidelines would scare away potential investors.

The proposals would make private equity groups maintain capital at troubled banks at levels that far exceed current regulatory standards for “well capitalized” institutions.

It would require a Tier 1 leverage ratio of 15 percent, for three years. Private equity groups would also have to maintain the investment in a bank for three years, unless they get special approval from the FDIC.

Bank regulators are increasingly looking to nontraditional investors to nurse failed banks back to health as the number of failed institutions continue to rise, draining the FDIC’s deposit insurance fund.

The FDIC will also vote on whether to expand a government program that guarantees transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

It also will consider the capital treatment associated with an accounting change that would force banks to bring more than $1 trillion of assets back on their books.

On Jan. 1, 2010, banks will have to move off-balance-sheet entities on to their financial statements, which will affect their capital levels and leverage ratios.

Banks have traditionally been allowed to pool some assets and liabilities, such as mortgages and credit card receivables, and sell them to off-balance-sheet trusts. That let banks move the assets and liabilities off their books, retaining only a small amount of risk should those assets sour.

The Financial Accounting Standards Board finalized rules earlier this year to force banks to move these obligations onto their books, and provide more disclosure than just footnotes that currently provide scant information to investors.

The Federal Reserve, during a recent “stress test” of the largest 19 U.S. banks, said the change could mean about $900 billion in assets being brought onto the books of those firms.

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