Faced with a rising caseload of failing banks, the Federal Deposit Insurance Corp. has decided it can’t be overly picky about who buys the carcasses.
The insurance fund’s board voted Wednesday to back down from a plan to require private equity firms to maintain an unusually high capital-to-assets ratio for failed banks they buy.
The FDIC board voted to lower to 10%, from a proposed 15%, a basic measure of the minimum capital that private equity investors must maintain for three years after buying a bank. Capital is a lender’s bulwark against losses.
“We want to maximize investor interest in failed institutions,” FDIC Chairwoman Sheila Bair said at the meeting, explaining the decision to lower the capital threshold.
Most failed banks are merged into other banks, but private equity buyers broaden the pool of potential bidders, which in theory could mean a savings to the FDIC in disposing of troubled banks.
Yet the 10% capital requirement still is twice the level that an existing bank must maintain to be considered “well-capitalized” by the FDIC.
The original 15% capital proposal had triggered outrage from some private equity leaders, including Wilbur Ross of WL Ross & Co., which was part of a partnership that bought the failed BankUnited Financial Corp. of Florida in May.
“I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form,” Ross told the FDIC last month.
Ross told Bloomberg TV on Wednesday that the revised proposal “is better than the one they had before, but it isn’t a champagne-cork popper.”
The Private Equity Council, representing some of the industry’s biggest firms, also called the FDIC’s revisions an improvement from the original plan. But the group still called the new rules “onerous” and said it was “counterproductive to impose measures that could deter investors who are ready, willing and able” to provide capital to banks.
Another potential sticking point: The FDIC stood firm on its plan to forbid private equity buyers from quickly flipping any banks they buy. They’ll have to hold on to the institutions for at least three years.
Besides BankUnited, IndyMac Bank of Pasadena also was sold to private equity investors.