Opening the Bank Vault to Private Equity

This is one that I just don’t get. The FDIC says it’s going to issue new guidelines for the purchase of failed banks by private equity companies while the newly proposed banking regulations take a harsh stance towards commercial enterprises owning insured depositories.

First from the WSJ the FDIC approach:

The Federal Deposit Insurance Corp. on Thursday is expected to propose tough new guidelines for private-equity investors seeking to buy failed banks, people familiar with the matter said.

The issue is a tricky one for the FDIC. It wants to open the door for more types of investors to buy failed banks, reducing the potential cost to the agency of bank collapses. At the same time, it wants to prevent largely unregulated private-equity firms from acting too aggressively.

The FDIC’s proposal isn’t final and could still change before it’s issued for public comment, people familiar with the matter said.

And this is what the Treasury said in its recently issued plan for reforming bank regulation:

All companies that control an insured depository institution, however organized, should be subject to robust consolidated supervision and regulation at the federal level by the Federal Reserve and should be subject to the nonbanking activity restrictions of the BHC Act. The policy of separating banking from commerce should be re-affirmed and strengthened. We must close loopholes in the BHC Act for thrift holding companies, industrial loan companies, credit card banks, trust companies, and grandfathered “nonbank” banks.

Perhaps I’m reading too much into it, but it seems to me that the FDIC’s proposal certainly violates the spirit of this objective. It’s actually a policy that encourages the merger rather than the separation of banking from commerce.

The WSJ article goes on to note some of the curbs being considered by the FDIC.

The proposal is expected to deter private equity investors from buying and flipping failed banks and could include a mandatory investment period. The proposal is also expected to require private-equity investors to hold higher capital reserves than traditional banks would be required to hold.

The proposal could require private equity investors that own several banks to offer some sort of cross-guarantee, so that one bank owned by the investors might have to serve as a source of strength to the other banks. And there could be another requirement that the private-equity investors remain a behind-the-scenes source of capital, beyond their initial investment.

It’s unclear how private equity investors will react to the proposal, in part because the full details haven’t been released. Some investors said overly stringent regulations could kill private-equity interest. It’s already complicated for private equity investors to buy banks because of strict federal rules about bank ownership.

If those rules are going to be hard for PE to swallow, how will they react to “…robust consolidated supervision and regulation at the federal level by the Federal Reserve…” Of course, none of that’s been defined so perhaps they’re counting on some sort of grandfather provision if they slip in before the new regulatory regime is memorialized.

I don’t understand the rush by the FDIC. It’s not as if they have a bunch of banks they’re sitting on that they need to get off the books. I would feel a lot more comfortable is this were part and parcel of the new regulatory scheme and thoroughly hashed out in Congressional debate than I am having the FDIC writing new rules on an ad hoc basis.

Selling banks to PE firms could turn out to be a singularly bad idea. Doing it without thorough discussion and coordination among all the regulators is a bad idea.

more: here and here and here (Previous posts on this subject)

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