FDIC to Issue Rules for Private Equity Deals

The Federal Deposit Insurance Corporation plans to issue new rules that could make it slightly easier for private equity firms to buy failed banks, according to people familiar with the agency’s deliberations.

CNBC.com

Under a directive to be issued on Thursday, the agency is expected to demand that investment firms like the Carlyle Group or Kohlberg Kravis Roberts provide follow-up support to the banks they acquire if the banks get into more trouble and need additional capital.

The new rules represent a difficult balancing act for the F.D.I.C, which is responsible for protecting depositors from losses.

On the one hand, government officials have been eager to recruit private investors and stretch out the limited money that Congress has approved for bailing out troubled financial institutions. On the other hand, bank regulators remain leery about letting comparatively high-risk investor groups take control of banks with billions of dollars in government-guaranteed deposits.

The F.D.I.C., which is responsible for insuring bank deposits, is eager to find buyers for insolvent banks and minimize the cost to taxpayers. The agency has seized 45 failing banks this year, and more than 60 since last fall.

Private equity firms can tap into huge pools of capital and they have been yearning to buy banks at bargain prices.

Federal regulators have allowed private equity investors to buy a handful of failing banks, notably the BankUnited Financial Corporation in Florida and IndyMac Bancorp in California.

But the approvals have been made slowly, and on a case-by-case basis. Agency officials said the rules to be adopted on Thursday amounted to a clarification of their policy rather than a drastic change.

Indeed, industry executives said on Wednesday evening that they were not sure if the new rules amounted to an easing or a tightening of longstanding restrictions that have kept most private equity investors out of the banking industry.

Among the rules under discussion, according to industry executives and government officials, are higher capital requirements for private equity investors than for traditional banks. The agency will also demand that private equity firms document their sources of strength, a reference to their ability to provide follow-up financing.

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For investors that own several banks, the agency would require cross guarantees in which a strong bank owned by an investment group could be enlisted to shore up the capital of a weaker bank owned by the same group.

Last but not least, the agency plans to include rules against flipping, to prohibit people from buying a bank and reselling it a few months later. Under the new rules, private equity firms would have to retain their investment in a bank for at least 18 months and possibly two years.

H. Rodgin Cohen, a lawyer at Sullivan & Cromwell who represents some private equity firms, said he was not sure whether the new rules would speed up or slow down their investment in banks.

“It’s always good to have an element of certainty,” Mr. Cohen said. “The question is whether this will put up barriers that are so discouraging economically that it will actually restrict private equity firms. We won’t know until the details are out.”

Regardless of the details, the new rules are not expected to change the main regulatory obstacle for private equity firms buying banks. That obstacle is the Federal Reserve, which requires that institutions holding more than 24.9 percent of a bank’s voting shares be subject to regulation as bank holding companies.

Except for a handful of private equity firms that specialize in banks, most firms are loath to fall under those regulations.

To get around those restrictions, private equity firms have teamed up to form “club” deals in which no individual firm exceeds the Fed’s threshold for control. But that arrangement is often unwieldy and cumbersome, because none of the investment firms is supposed to be in “control.”

“The F.D.I.C. does not control what happens,” said Joshua Siegel, managing principal at StoneCastle Partners, a private equity firm in New York. “The Fed is in charge.”

This story originally appeared in the The New York Times