FDIC to Require Buyout Firms to Hold Banks for Three Years

The FDIC recommended in Washington today that private-equity firms  interested in acquiring or investing in the assets and liabilities of failed banks, hold the lenders for three years, — double  the length imposed in the latest transaction — be well-capitalized at a Tier 1 leverage ratio of 15%, and continue maintaining that level of capitalization well-after the initial acquisition.  The new rule, which was among a half-dozen guidelines announced by the FDIC, aims to prevent the acquired depository institutions from being “flipped” for a short-term profit.

From Bloomberg:

The FDIC wants to ensure that new entrants to the banking industry are “prudently managed,” Chairman Sheila Bair said at the board meeting where the rules were discussed…

The rules underscore the FDIC’s efforts to court private-equity firms that have about $400 billion to invest while paying heed to politicians who worry that the buyout companies will prove to be lax stewards of the industry. Private-equity firms pumped more than $1 billion in May into U.S. banks, 45 of which have been closed by the FDIC this year.

Most worrisome to private-equity firms may be any changes proposed by the FDIC to the so-called source of strength doctrine, which requires a bank’s owner to support an ailing lender. The FDIC said today that potential investors would be expected to serve as a source of strength “for their subsidiary depository institutions,” according to the policy statement issued by the board.

The FDIC statement on failed bank acquisitions »

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