Wednesday, August 26, 2009

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

By Alison Vekshin, Bloomberg

Aug. 26 (Bloomberg) -- The Federal Deposit Insurance Corp. approved guidelines for private-equity firms to buy failed banks, opening a growing pool of failing lenders to new buyers and limiting costs to the agency and the industry.

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.

“The FDIC recognizes the need for additional capital in the banking system,” FDIC Chairman Sheila Bair said at the meeting. “We want to maximize investor interest in failed institutions.”

The agency is seeking to encourage private-equity investors to bid on assets of collapsed banks as the pace of failures reaches a 17-year high with 81 so far this year, draining the agency’s insurance fund by more than $21 billion. The surge has forced the FDIC to enter loss-sharing arrangements and absorb other costs to unload the assets of failed lenders.

The FDIC has twice brokered deals with private-equity groups this year. In March, California-based IndyMac Federal Bank, split off from IndyMac Bancorp Inc., was sold to investors led by Steven Mnuchin, an ex-Goldman Sachs Group Inc. investment banker, and including buyout firm J.C. Flowers & Co. Florida’s BankUnited Financial Corp. was sold in May to firms including Blackstone Group and WL Ross & Co.

U.S. Senator Jack Reed, a Rhode Island Democrat who leads a Banking Committee panel overseeing the securities industry, wrote to Bair in May asking her to spell out rules for private- equity firms investing in banks.

The FDIC proposed the rules in July and released them for 30 days of public comment, prompting complaints from private- equity firms that the rules were too onerous and would discourage industry participation.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: August 26, 2009 16:11 EDT