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FDIC Expected to Soften Restrictions for Firms to Buy Ailing Lenders

Source: Wall St. Journal

Posted on 21 Aug 2009

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The Federal Deposit Insurance Corp. is expected to reduce restrictions on private equity firms that wish to purchase collapsed lenders. The change is seen as an attempt to attract more buyers for failed banks, say sources familiar with the matter.

While FDIC officials still are hammering out details of the final rule, the agency is expected to back away from some parts of its July proposal, including a requirement that buyout firms that bid on failed institutions maintain much thicker capital cushions than banks, these people said.

The FDIC, grappling with 77 bank failures this year, the most since 1992, is trying to strike a delicate balance.

It wants to lure more capital into the banking industry but is wary of putting banks in the hands of investors who might promote risky lending practices or ditch the investments if profits don't quickly materialize.

The FDIC's original proposal sparked an outcry among private-equity firms, which warned that the rules were unnecessarily onerous and would deter them from bidding on failed banks.

Some recent FDIC auctions of failed banks have suffered from lackluster interest from buyers, participants said. Private-equity firms have placed some bids but notched few victories. One exception was the sale of BankUnited FSB, Coral Gables, Fla., in May to a group led by W.L. Ross & Co.

The FDIC's board is expected to vote on the private-equity rules Wednesday. An FDIC spokesman said the board hasn't made a final decision.

The FDIC is expected to retreat from its July proposal that private-equity firms have a Tier 1 capital ratio of at least 15% in order to bid on failed banks, and instead require ratios of at least 10%, said the people familiar with the matter.

It isn't clear whether that threshold will be in the form of Tier 1 or another type of capital. To be considered well-capitalized, banks need to maintain Tier 1 ratios of at least 5%. The FDIC set the bar higher for private-equity firms to compensate for their generally larger risk appetites.

The FDIC also is expected to ease provisions, opposed by private equity, that would require buyout firms to serve as a "source of strength" to banking subsidiaries. Such a rule would require the private-equity firm to act as a financial backstop if its banking unit runs into trouble.

The rules aren't expected to be completely watered down. Buyout firms still will have to hold on to bank charters for at least three years, limiting their ability to turn quick profits.

Since the FDIC proposed the rules, the private-equity industry has flooded the agency with letters, criticizing the proposal. But others have pushed for tougher regulations.