Revised FDIC Policy Clears Way for Experienced PE Firms
We recently discussed the FDIC's adoption of a final policy statement governing private equity investments in failed banks. As we and other commentators have noted, the final policy continues to put private equity investors at a disadvantage when compared to strategic investors such as existing regulated bank institutions. Most importantly, the policy imposes a substantially higher capital requirement for private equity firms (10% of Tier 1 capital vs. 5%) which must be maintained for at least 3 years.
The final policy statement reflects the FDIC's earnest desire not to turn over bank deposits -- that amazing funding source guaranteed by the full faith and credit of the United States -- to unschooled and possibly unscrupulous owners. That mistake was made during the last banking crisis, and one thing that people in large bureaucracies learn well is not to repeat the mistakes of the recent past. Accordingly, the FDIC must do what it can to ensure that the private capital which comes to the rescue of failed banks is provided this time by firms and management teams that respect the sanctity of bank deposits, and the FDIC's guarantee.
The policy statement is just that -- a statement of policy. In many important areas, there are no detailed regulations, defined terms, or clear rules to guide deal making. Sooner or later, any private equity firm looking at purchasing a troubled bank must contact the FDIC to get its opinion on the meaning of key provisions of the policy. One may justly conclude that this is exactly what the FDIC wants to have happen. By compelling firms to get critical interpretive clearance on key deal terms, the FDIC has the ability to screen firms and their management teams and sift the wheat from the chaff, so to speak.
The final policy statement is an important road map for well-regarded and experienced private equity firms to invest in troubled banks. Other players, without deep experience and respected management teams to run the banks, may as well sit out this round. Of course, things can change. The crisis may escalate and the need for fresh capital may become acute. Also, given the large number of troubled banks on the horizon, there may be opportunities to purchase the assets of institutions that must be liquidated because they fail to find buyers deemed worthy by the FDIC.
