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FDIC proposes tighter rules on private equity bank deals

Private equity firms would have to comply with tighter standards for capitalisation, hold periods and disclosure requirements if proposed rules from US banking regulator FDIC are approved.

Private equity firms seeking to invest in banks would have to meet high capitalisation requirements and longer required hold periods under proposed rules by the Federal Deposit Insurance Corporation released Friday.

“I am particularly concerned with new owners’ ability to support depository institutions with adequate capital, management expertise, and a long term commitment to provide banking services in a safe and sound manner,” FDIC chairman Sheila Bair said in a statement.

“Obviously, we want to maximize investor interest in failed bank resolutions,” Bair said. “On the other hand, we don’t want to see these institutions coming back.”

The proposed guidelines call for an acquired financial institution to be “very well capitalised at a Tier 1 leverage ratio of 15 percent”. For example, a $100 million bank with a 15 percent leverage ratio would need to keep $15 million in the bank, an FDIC spokesman said. The proposed rules also would force private equity firms to hold their bank investments for at least three years.

Private equity firms would have to provide cross guarantees, meaning if a firm owns two banks, the stronger bank would have to provide support to the weaker bank. Firms also would be barred from using the acquired bank to extend credit to their investment funds.

The proposed rules now enter a 30-day public comment period.

Regulations on how long firms should hold bank investments are necessary to prevent efforts at “flipping” struggling banks, which could destabilise banks already in weak positions, according to Scott McCallum, senior manager with consulting company Cendrowski Corporate Advisors.

“The FDIC doesn’t want people to come in, pluck off a bank and in short order flip it,” McCallum said. “On the other hand, you can’t force real long term holds on these guys … something like 18 to 24 months might be ok.”

Tighter restrictions could be a reflection of the government backing off from its enthusiasm of a few months ago for partnering with the private sector on reviving the banking sector, according to Jeff Berman, an attorney with Clifford Chance.

“I think what the government would rather do is use government money to bridge these institutions to a point where they could be offered to the public,” Berman said. “I think there is a political distrust of what it would look like if the private equity firms made a lot of money in this space.”

Several mega-firms have clubbed together in deals to buy failing banks. WL Ross, Carlyle, Blackstone and Centerbridge Partners in May backed a $900 million buyout of Florida-based BankUnited.