Chilling out Bank Bidders with New Policies from FDIC

Summary: The FDIC is trying to deal with continuous bank failures without draining money to be used in paying back depositors when these institutions collapse. This means that it needs to attract much capital into the banking sector from private investors. However, their new policies may hinder this goal.

On Thursday, Federal Deposit Insurance Corporation proposed new policies that might chill the interest of private investors to buy failed or struggling banks.

 Federal Deposit Insurance Corporation (FDIC) needs more new capital in order to sell more failed banks without acquiring big losses. And since private-equity firms have some capital that they need to put to work, then selling these struggling banks to such firms should not be a problem. Another reason is because buyout industry can use a lot of leverage and sell businesses quickly.

On Thursday, however, an FDIC staff said that these buyout firms and other private capital investors need to keep Tier 1 capital ratio of 15% at least for three years. Also, they have to provide “contractual cross guarantee over the substantially common owned” banks. This means that those private-equity firms owning more than one bank must tap stronger lenders in order to support the weaker ones that they have.

The former special counsel at Office of Thrift Supervision and current counsel of financial and banking institutions group at Paul Hastings law firm, Lawrence Kaplan, said “I’m flabbergasted. Private-equity investors might lose their zeal to invest in today’s undervalued market since upfront costs are going to be too much.”