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New Rules Pave way for Buyout Firms to buy Banks

As expected, the FDIC relaxed the federal requirements for private equity firms that acquire banks. Here, courtesy of investment adviser Concept Capital, are the highlights of the new rules:

  • Discretion. The proposal gives the FDIC the discretion to waive any requirement if it is in the best interest of the FDIC.
  • Retroactive. The agency clarified that these changes only apply to future deals and do not impact existing private equity investments.
  • Source of Strength. The FDIC dropped this contentious provision, which as initially proposed could have required PE firms to be a source of strength to the bank.
  • Six Month Review. The agency agreed to automatically review in six months whether the restrictions on private equity were protecting the deposit insurance fund from losses.
  • Capital Requirement.The FDIC established a Tier 1 common equity ratio of 10% as the requirement rather than the 15% leverage ratio as initially proposed. This is much closer to the capital requirement that de novo banks must maintain. This higher limit applies for three years.
  • Cross Support.The FDIC had discussed imposing a cross guarantee requirement on private equity firms that appeared to go beyond what was required of banking companies. In effect, a private equity firm that invested in multiple banks might have to use those other banks to support each other in times of stress. In the final rule, the FDIC said the cross support would apply if multiple banks share 80% of the same investors.
  • Duration of Investment.The FDIC proposed barring private equity firms from selling the bank for three years. The agency kept this provision, though it exempted open-ended mutual funds.
  • Limits on Existing Management. The FDIC proposed barring management who owned 10% or more of the failed bank from bidding on the failed bank. The agency keeps this restriction.
The new policy "both protects the interests of taxpayers in a safe and sound banking system, and provides the guidance that investors need to evaluate investments in the deposit operations of failed institutions," said FDIC chairman Sheila Bair in a statement.

It also represents a significant concession by the FDIC, underscoring how badly the agency needs buyout investors to start taking struggling banks off its hands.

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