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Wednesday 26 August 2009

FDIC Sets Rules for Private Equity to Buy Shut Banks

Reading - FDIC Sets Rules for Private Equity to Buy Shut Banks http://bit.ly/DcF9Z

The Federal Deposit Insurance Corp. approved weakened rules for letting private-equity firms buy failed banks, aiming to widen a pool of potential acquirers for a growing roster of shuttered lenders.

The FDIC board, in a 4-1 vote today, lowered Tier 1 capital ratio requirements for private-equity buyers to 10 percent from the 15 percent proposed July 2. Investors will be required to maintain the 10 percent ratio for at least three years.

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

The regulator is seeking to lure non-bank investors including private-equity firms to bid on assets of collapsed banks as failures reach a 17-year high with 81 so far in 2009. The surge, which has drained the FDIC’s insurance fund by more than $21 billion, has forced the agency to enter loss-sharing arrangements and absorb other costs.

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 Wilbur Ross’s WL Ross & Co.

Today’s vote, which followed a public comment period on the July proposal, shows the FDIC was listening to critics who said the initial plan would drive away potential investors, Ross said in a Bloomberg Television interview.

‘Champagne-Cork Popper’

“The new proposal is better than the one they had before but it isn’t a champagne-cork popper,” Ross said.

The agency agreed to shelve a proposal that would have required investors that owned at least two banks to cover losses in the event of a failure. The rules scale back this provision, applying it only if a group of investors owns at least 80 percent of two or more banks.

Office of Thrift Supervision Acting Director John Bowman, the only FDIC board member to vote against new rules, said there isn’t sufficient evidence that the guidelines are needed.

“It is hard to know whether the requirements are justified,” Bowman said. “The scope of the policy statement is overly broad and imprecise.”

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.

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