Fri, Aug 28, 2009 page10

• FDIC eases rules on bank purchasing

  HELP: With FDIC funds at only US$13 billion and bank failures expected to cost US$70 billion through 2013, the board eased rules on private equity funds buying failed banks

  • AP
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  Federal regulators have eased restrictions for private investors seeking to buy failed banks, as the tally of collapsed institutions mounts and well-funded buyers become scarce.

  The Federal Deposit Insurance Corp’s (FDIC) board voted four-to-one on Wednesday to revise the rules it proposed last month in a way that reduces the amount of cash private equity funds must maintain in banks they acquire.

  The minimum capital requirement was reduced to 10 percent of the bank’s assets from 15 percent. The required capital must be maintained in the bank for at least three years, a mandate unchanged from the earlier proposal.

  

  Sheila Bair, FDIC chairman, right, speaks to Martin Gruenberg, FDIC vice chairman, at an FDIC board meeting in Washington on Wednesday.

  PHOTO: BLOOMBERG

  Private equity funds have been criticized for their risk-taking and outsized pay for managers. But the depth of the banking crisis appears to have tempered the FDIC’s resistance to private investors buying failed banks. That’s partly because fewer healthy banks are willing to acquire other, ailing institutions with the financial crisis causing banks to fail at the fastest pace since the height of the savings-and-loan crisis in 1992.

  Eighty-one banks have failed so far this year, compared with 25 last year and three in 2007. The closings have drained billions from the FDIC deposit insurance fund, which insures regular bank accounts up to US$250,000 and is financed with fees paid by US banks.

  “The FDIC recognizes the need for new capital in the banking system,” the agency’s chairperson, Sheila Bair, said before the vote.

  The compromise struck among the FDIC directors — two of whom opposed the policy as proposed early last month — “is a good and balanced one,” Bair said.

  Banks need to be operated “profitably but prudently,” she said.

  One of the two original opponents, Comptroller of the Currency John Dugan, said the rules as originally written would have been “very costly” to the deposit insurance fund and the new ones “are a significant improvement.”

  The new policy also reduced the circumstances in which investment funds themselves would be required to maintain minimum levels of capital that can be provided to bolster banks they own.

  John Bowman, acting director of the Office of Thrift Supervision, was the lone holdout on Wednesday, saying the new policy “could chase potential investors away.”

  The FDIC estimates bank failures will cost the fund around US$70 ­billion through 2013. The fund stood at US$13 billion — its lowest level since 1993 — at the end of March. It’s slipped to 0.27 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.

  The FDIC seizes failed banks and seeks buyers for their branches, deposits and soured loans. Under the crush of failures, the agency says private equity can inject vitally needed capital into the system, especially with fewer healthy banks looking to acquire failed institutions.

  “There’s an enormous need for private money to do this,” said Josh Lerner, a professor of finance at Harvard Business School.

  Private equity firms mostly buy distressed companies, slash costs and then resell them a few years later. They invest their own capital to buy a company and pump it up with money from other investors.

  Such “leveraging” to buy companies amounts to, on average, a three-to-one investment for private equity firms: They attract US$3 in outside capital for each US$1 they put up themselves. The roughly 2,000 private equity firms in the US have around US$450 billion in capital to invest, according to the Private Equity Council, the industry’s two-year-old advocacy group.

  The private equity industry is exploiting the economic crisis to enrich itself, said Stephen Lerner, director of the private equity project at the Service Employees International Union.

  “They are trying to use their political and financial sway to get into what they see as bargain basement prices for very little risk,” he said.
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