By Suzanne Kapner and Helen Thomas in New York. FT.com
Published: March 28 2010 21:33 | Last updated: March 28 2010 21:33
US regulators are stepping up their scrutiny of rules that enable buyers of failed banks to take an accounting gain – dubbed “Christmas capital” – by acquiring assets at a discount, according to people familiar with the discussions.
Regulators are discussing guidelines to limit how much of a bank’s capital can be comprised of such gains. The talks involve leading bank regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
“The FDIC wants to make sure the acquirer has capital beyond the gain generated from the transaction,” said one person with knowledge of these deals. The FDIC hopes to prevent acquirers of troubled banks from facing problems down the road if assets deteriorate.
In typical deals, an acquirer would pay above market value for a bank and record the difference as goodwill, which is written off over time. In sales of failed banks by the FDIC, the opposite occurs. Most of the assets are sold at below market prices, and buyers are allowed to record the difference as a gain, known as the bargain purchase option or negative goodwill, that translates into an increase in capital.
An accounting rule change last year allowed companies to recognise such gains immediately as earnings, whereas previously the gain was capitalised on the balance sheet as deferred revenue. But that aid to failed bank buy-outs might now be partially reversed.
“The FDIC is taking away a little bit of the ‘juice’ in the failed bank cocktail, making it a little less attractive to buy failed banks and a little less expensive for taxpayers,” said Chris Marinac, analyst with FIG Partners.
FDIC spokesman Andrew Gray characterised the change as a positive development that pointed to a stronger economy.
Banks benefiting from the rule in recent months have included East West Bancorp, which booked a $292m after-tax gain when it acquired $10.4bn of assets of the shuttered United Commercial Bank, and Pacific West, which booked a $39m after-tax gain when it acquired m’s $1.2bn in assets.
In another sign that regulators are tightening the rules, the FDIC is scaling back its role in loss-sharing agreements. The FDIC is to only cover losses on up to 80 per cent of bad loans, compared with a previous ceiling of 95 per cent.
The Financial Times Limited 2010