Given the large number of bank failures over the last 18 months, the FDIC is seeing increased interest from would-be investors interested in purchasing depository assets of the failed institutions. Concern has risen at the regulatory level about whether these new bank owners and investors have the qualifications necessary to keep the acquired assets from returning to the failed assets pool. That concern has led the FDIC to issue a proposed policy statement that would, if adopted, establish a new set of qualifications for investment groups intending to purchase failed bank assets.
The proposed standards address the following topics:
- Ownership structure
- Capital levels
- Cross guarantees
- Affiliate transactions
- Continuity of ownership
- Secrecy law jurisdictions
- Limitations on the existing owners of the failed institution
- Disclosure requirements
Key measures of the proposal
- Silo structures will not be deemed eligible for bidding.
- A Tier 1 leverage ratio of 15 percent is required and must be maintained for three years. After that, the institution must remain "well capitalized."
- The holding company must agree to sell stock or engage in capital qualifying borrowing to support the depository institution.
- Investors with interests in more than one FDIC-insured institution have to pledge to the FDIC their proportionate interests in each institution.
- Loans to investors or investors' affiliates would be prohibited.
- Investors would have to retain ownership in the institution for at least three years. The FDIC can approve exceptions.
- Ownership structures involving entities domiciled in bank secrecy jurisdictions will not be eligible bidders.
- Investors owning 10 percent or more of the failed institution will not be eligible bidders.
- Investors will have to disclose to the FDIC information pertaining to the size and composition of capital funds, the business plan, the management team, etc.
Bidders subject to proposed rules
Under the current proposal, these rules would only be applicable to certain types of bank acquirers, namely:
- Private capital investors attempting to take ownership of deposit liabilities that are currently in receivership
- De novo institutions applying for FDIC insurance in association with "the resolution of failed insurance depository institutions"
Balancing capital needs with prudence
While the FDIC is conscious of the need to qualify bidders, regulators are also concerned about placing too many limitations on the inflow of new capital into the banking system. The banking system needs private investor capital. Are these proposed rules going to inhibit the flow of that new capital? Or will the new standards deliver the right amount of prudence? Feel free to sound off!
Read the full FDIC statement here: http://www.thefederalregister.com/d.p/2009-07-09-E9-16077 The proposal policy statement is open for public comments until early-August.