Financial Regulatory Forum

U.S. FDIC eases rules on private-equity investments in troubled banks

By Reuters Staff
August 26, 2009

Federal Deposit Insurance Corporation Chairman Sheila Bair smiles as she testifies before a House Financial services committee hearing on Regulatory Perspectives on the Obama Administration's Financial Regulatory Reform Proposals on Capitol Hill in Washington July 24, 2009. REUTERS/Yuri Gripas (UNITED STATES POLITICS WASHINGTON, Aug 26 (Reuters) – U.S. banking regulators voted on Wednesday to ease rules applying to private investments in troubled banks.

The board of the Federal Deposit Insurance Corp voted 4-1 to change previous proposals that some regulators and potential investors said had threatened to scare away much-needed capital from the banking industry.

A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 percent, from the 15 percent previously proposed.

The regulators also dropped a requirement that investors serve as a “source of strength” for the bank they buy, which critics said could have put them on the hook for more capital if the institution struggled.

A cross-guarantee proposal — meaning if a company owns more than one bank the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered — was also modified to apply only to investors with an 80 percent stake.

“The FDIC recognizes the need for additional capital in the banking system,” Bair told the meeting of the FDIC board.

The dissenting vote was from acting director of the Office of Thrift Supervision, John Bowman, who said the revised policy was overly broad and imprecise. He also expressed unease at singling out private equity investors as a separate group.

Voting for the rules were Bair, FDIC Vice Chairman Martin Gruenberg, FDIC Director Thomas Curry and Comptroller of the Currency John Dugan.

Dugan had raised concerns in July about the initial version of the rules, but said he supported the new guidelines, describing them as “significantly improved.”

U.S. bank regulators are increasingly looking to nontraditional investors — such as private equity groups and international banks — to nurse failed banks back to health as the number of insolvent institutions continues to rise, draining the FDIC’s deposit insurance fund.

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.

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