Wanting to Bid on Failed Bank Acquisitions? FDIC Proposal Rankles Private Equity Suitors

July 22, 2009 at 8:21 pm Leave a comment

            The FDIC recently unveiled a Proposed Statement of Policy (available here) on Qualifications for Failed Bank Acquisitions with the intention of providing guidance to private capital investors interest in acquiring or investing in the assets and liabilities of failed banks or thrifts.  Although the FDIC recognizes the need for additional capital in the banking system, the FDIC’s policy statement seeks to minimize the safety and soundness concerns of introducing these new investors into the banking system.  Under the proposed policy statement, the FDIC would establish standards for bidder eligibility in connection with the resolution of failed banks. 

According to the FDIC, the standards provide for:

  • capital support of the acquired depository institution;
  • agreement to a cross guarantee over substantially commonly owned depository institutions;
  • limits on transactions with affiliates;
  • maintenance of continuity of ownership;
  • clear limits on secrecy law jurisdiction vehicles as the channel for investments;
  • limitations on whether existing investors in an institution could bid on it if it failed; and
  • disclosure commitments.

 In applying these standards, the FDIC’s proposed policy statement includes some burdensome requirements.  Of particular significance, any private equity investors would be required to agree to cause the depository institution acquiring deposit liabilities and/or assets of failed depository institution to be initially capitalized at a minimum 15% Tier 1 leverage ratio for a period of 3 years.  Failure to meet this requirement would result in the institution being treated as “undercapitalized” for purposes of Prompt Corrective Action triggering the measures available to an institution’s regulator in such a situation.  In addition, an insured depository institution acquired or controlled by such investors would be prohibited from providing these investors and their affiliates any extensions of credit. 

While the initial proposal included these onerous burdens for interested private investors, the proposal remains open for comment  (here) until August 10th.  Whether such steep requirements remain in the final Statement of Policy will surely impact the number of private investors who are willing to qualify and bid on failed bank acquisitions.

Entry filed under: FDIC.

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