On August 26, 2009, the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") voted 4-1 in favor of adopting certain revisions and clarifications to its Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions issued on July 9, 2009 (the "Proposed Policy Statement"). The Proposed Policy Statement imposed stricter requirements on investments in failed banks by private equity investors than requirements imposed on strategic investors.

Although the revisions and clarifications that the FDIC adopted in its Final Statement of Policy may not have gone far enough to fully appease private equity investors and although the final standards as adopted may depress investor interest in banks according to the FDIC's own statement, the revisions did provide some relief to private equity investors. Only time will tell whether the relief goes far enough to stimulate investment in failed banks by private equity investors is an unanswered question.

In adopting the Proposed Policy Statement and the Final Statement of Policy, the FDIC said that it recognizes the need for additional capital in the banking system and the potential contribution that private equity capital could make toward meeting that need, but stated it is only interested in contributions from private equity investors if those contributions are "consistent with the basic concepts applicable to ownership of insured depository institutions that are contained in the established banking laws and regulations."

With eighty-four bank closures to date in 2009, it is clear that opportunities exist for private equity investors interested in making acquisitions of failed banks. The Final Statement of Policy provides guidance to private equity investors interested in making such acquisitions.  

Applicability

The standards set forth in the Final Statement of Policy apply only to the following:

  • private investors in a company that is proposing to, directly or indirectly, assume deposit liabilities from the resolution of a failed insured depository institution; and
  • applicants for insurance in the case of newly issued charters in connection with the resolution of failed insured depository institutions.

The Final Statement of Policy does not apply to the following situations:

  • investors with 5 percent or less of the total voting power of an acquired depository institution or its holding company; or
  • investors in a partnership with a bank or thrift holding company in which such holding company has a strong majority interest in the resulting bank or thrift and an established record for successful operation of insured banks or thrifts.

It should be noted that investors can apply to the Board of Directors of the FDIC for a determination that the Final Statement of Policy standards no longer apply to an acquired bank or thrift holding company if the bank or thrift has maintained a composite Camels 1 or 2 rating continuously for seven years. The Board must approve any such application. (Note: Camels Ratings refer to the system utilized by the Federal Reserve to assess an institutions capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk; the ratings are based on a scale of 1 to 5 with 1 being the highest score an institution can achieve).

Standards for Investments

Investors interested in making acquisitions of failed depository institutions must satisfy the following standards set forth in the Final Statement of Policy:

  • Capital Commitment. The depository institution resulting from the acquisition must maintain a ratio of Tier 1 common equity to total assets of at least 10 percent for a period of three years from the time of acquisition. At all times thereafter, the depository institution must be "well capitalized." The Proposed Policy Statement required a Tier 1 ratio of 15 percent so the reduction to 10 percent in the Final Policy Statement represents a beneficial change in favor of private equity investors.
  • Cross Support. If one or more investors own 80 percent or more of two or more banks or thrifts covered by the Final Policy Statement, the stock of the banks or thrifts commonly owned by the investors must be pledged to the FDIC, and if one of the depository institutions fails, the FDIC may exercise such pledges to the extent necessary to recoup any losses incurred by the FDIC as a result of the bank or thrift failure. The cross support requirements in the Final Policy Statement are scaled back slightly from the version contained in the Proposed Policy Statement, but are not materially different.
  • Transactions With Affiliates. All extensions of credit to investors, their investment funds and any of their respective affiliates by an insured depository institution acquired by the investors are prohibited. Existing extensions of credit in place at the time of acquisition would not, however, be effected. The prohibition on transactions with affiliates in the Final Policy Statement does not represent a material change from the Proposed Policy Statement.
  • Continuity of Interest. Investors are prohibited from selling or otherwise transferring their securities in the acquired institution for a three year period following the acquisition. The three year holding period requirement in the Final Policy Statement is consistent with the holding period contained in the Proposed Policy Statement. Prohibited Structures. Both the Proposed Policy Statement and the Final Policy Statement prohibit ownership structures in which the beneficial ownership is difficult to ascertain with certainty, the responsible parties for making decisions are not clearly identified, and ownership and control are separated. The Final Policy Statement identifies structures involving a single private equity fund that seeks to acquire ownership of a depository institution through creation of multiple investment vehicles, funded and apparently controlled by the parent fund as structures that typify prohibited structures under the guidelines. In adopting this standard, the FDIC expressed its needs to ascertain beneficial ownership, clearly identify the parties responsible for making management decisions and ensure that ownership and control are not separated.
  • Secrecy Law Jurisdictions. The Final Policy Statement prohibits investors from employing structures utilizing entities that are domiciled in bank secrecy jurisdictions unless the investor is a subsidiary of a company that is subject to comprehensive consolidated supervision as recognized by the Federal Reserve and the investor enters into agreements providing for the provision of information about non-domestic operations, maintains its books and records in the U.S., consents to disclosure that may be protected by privacy laws and agrees to cooperate with the FDIC in obtaining information maintained by foreign government entities. The Final Policy Statement is generally consistent with the Proposed Policy Statement in regards to secrecy law jurisdictions.
  • Special Owner Bid Limitation. Investors that hold a position of 10 percent or more of the equity of a bank or thrift in receivership are not eligible to bid for that failed institution.
  • Disclosure. Investors will be required to submit to the FDIC information about the investor and all entities in the ownership chain, including information about the fund, its diversification, return profile, marketing documents, management team and business model.

Conclusion

Although the FDIC's Final Policy Statement will not satisfy all private equity investors interested in making acquisitions of failed depository institutions, it is a step in the right direction and provides guidance regarding the terms and conditions imposed by the FDIC for making such acquisitions. In light of the number of failed institutions and the need for capital in the banking system, opportunities abound for investment by private equity funds willing to work within the framework established by the FDIC.