The U.S. Federal Deposit Insurance Corp. will meet this week to vote on a proposed policy that would force private equity groups to maintain high capital levels and put a large amount of their own money at stake when investing in failed banks.
The FDIC provoked a backlash when it proposed the guidelines in July and is expected to soften the policy when it meets Aug. 26. The meeting’s agenda was posted on the FDIC website last week, but it provided few details on the specific proposals.
Some investors and regulators previously said that the proposed rules were too harsh and would quash the interest of private equity groups at a time when the FDIC is trying to court investors for an increasing number of failed banks.
FDIC Chairman Sheila Bair defended the proposals, saying strong capital requirements and other provisions should be imposed to ensure the safety and soundness of the banks.
But she also said she was open to industry input on whether the guidelines would scare away potential investors, and modified rules could be considered.
At this week’s meeting, the FDIC will also consider whether to extend its transaction account guarantee program and a rule about the capital cushions that banks must hold when they bring off-balance-sheet entities back onto their books.
As first proposed, the private equity guidelines would make investors maintain capital at troubled banks at levels that exceed current regulatory standards for ““well capitalized” institutions.
It would require a Tier 1 leverage ratio of 15%, for three years. Private equity groups would also have to maintain the investment in a bank for three years, unless they get special approval from the FDIC.
Industry sources expect the leverage ratio to be reduced to about 10% when the guidelines are finalized.
Another rule, which has also caused concern, says investors would be expected to serve as a “source of strength“ for their subsidiary depository institutions. That would seem to mean the private equity group would be responsible for adding more funds into the bank if it continued to struggle.
That requirement is also expected to be modified, industry sources have said.
Bank regulators are increasingly looking to nontraditional investors to nurse failed banks back to health as the number of failed institutions continue to rise, draining the FDIC’s deposit insurance fund. —Karey Wutkowski and Megan Davies, Reuters