FDIC’s Objective Is A “Safe and Sound” Banking System
On July 2, 2009, the FDIC issued a proposed policy statement on the qualifications for failed bank acquisitions by private capital investors. Since that time, their have been intense lobbying efforts by private equity groups to persuade the FDIC to relax the rather stringent proposed capital requirements of a Tier 1 leverage ratio of 15% and a mandatory minimum ownership period of 3 years. Traditional banking institutions, by comparison, are only generally required to maintain a Tier 1 ratio of 5%.
The FDIC noted that they were “keenly aware of the need for additional capital in the banking system” but their overriding concern was to ensure that purchased failed banks were operated in a safe and sound manner.
The FDIC is particularly concerned that owners of banks and thrifts, whether they are individuals, partnerships, limited liability companies, or corporations, have the experience, competence, and willingness to run the bank in a prudent manner, and accept the responsibility to support their banks when they face difficulties and protect them from insider transactions.
The FDIC has reviewed various elements of private capital investment structures and considers that some of these investment structures raise potential safety and soundness considerations and risks to the Deposit Insurance Fund (DIF) as well as important issues with respect to their compliance with the requirements applied by the FDIC in its decision on the granting of deposit insurance.
FDIC Chairman Sheila Bair noted that, “Obviously we want to maximize investor interest in failed bank resolutions. On the other hand, we don’t want to see these institutions coming back”.
Will Private Investors In Failed Banks Win Or Lose?
Private equity investors who are obviously seeking to profit from their investment of capital in failed banks, strenuously objected to the high capital ratios proposed by the FDIC. Wilbur Ross, a billionaire private investor who had participated in the buyout of failed BankUnited, stated that “I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form”. Mr Ross was also alarmed that the proposed capital requirements would be retroactively imposed on the BankUnited buyout which would diminish the value of his investment.
FDIC Issues Final Statement Of Policy On Acquisition of Failed Banks
The compromise from the FDIC today in their final policy statement seems even handed and wise. Private investors would be required to maintain Tier 1 leverage ratios of 10% (in most cases) and be required to maintain bank ownership for at least 3 years. The fact that private equity investors demanded a 5% capital ratio indicates that they expected to profit handsomely at that level from their investment in failed banks. If we see an increase of private equity investment in failed banks, that will indicate that investors still expect to profit handsomely even under the tougher FDIC capital requirements.
The FDIC’s primary mission is to ensure a sound banking system. Private equity investors primary mission is to maximize profits. Given the competing roles of the parties involved and considering the primary importance of maintaining a sound banking system, the FDIC’s final policy probably best represents the public interest.
FDIC Chairman Sheila Bair’s well reasoned comments on the final policy statement are as follows:
FDIC Chairman Sheila C. Bair said, “The Policy Statement strikes a thoughtful balance to attract non-traditional investors in insured depository institutions while maintaining the necessary safeguards to ensure that these investors approach banking in a way that is transparent, long term and prudent. Most importantly, the statement assures that acquired institutions will have adequate capital, that there will be stability in management, and there will be strong protections to ensure that lending decisions will be both objective and independent. It both protects the interests of taxpayers in a safe and sound banking system, and provides the guidance that investors need to evaluate investments in the deposit operations of failed institutions.”
The FDIC wants all owners of banks or thrifts, whether they are individuals, partnerships, limited liability companies, or corporations, to have the experience, competence, and willingness to run the banks in a prudent manner, to support them when they face difficulties, and to protect them from abuses. At the same time, the FDIC has noted that the banking industry is in need of additional capital and that there is capital available that could fill that need. In order to facilitate private capital investments in the banking industry, the FDIC issued in July a Proposed Statement and sought public comment on the proposal.
The FDIC received a substantial number of comments on these standards, and they provided helpful insight regarding the issues related to private capital investments. After careful consideration of those comments, the FDIC has incorporated a number of significant changes into a final policy statement. Those changes include, for example, refining the description of the types of investors covered, changing the capital standard to one that is a better measure of the capital available to absorb losses, and clarifying the circumstances in which the cross support obligation would apply.