The Office of the Comptroller of the Currency (OCC) of the US Treasury Department just announced a new procedure to facilitate private equity investments for the acquisition of deposit liabilities and other business from troubled US banks and thrifts. In connection with its conditional approval of a charter for the new Ford Group Bank, N.A. in Dallas, the OCC outlined a procedure by which nonbank investors could for the first time obtain conditional OCC approval of a new national bank charter (Shelf Charter) and could thus form the legal entity known as a "national bank in organization," thereby qualifying to receive invitations from the Federal Deposit Insurance Corporation (FDIC) to bid on the deposits and assets of institutions that the FDIC had or was about to close. Under this new Shelf Charter procedure an investor group submits a simplified application to charter a new national bank, outlining the names and qualifications of the management team, the amounts and sources of available capital, and an abbreviated strategic business plan. Similar to a home buyer's preliminary qualification for a mortgage loan, this Shelf Charter allows the group's representatives to review FDIC bid packages and to submit bids in the name of the new national bank in organization. If the bid is accepted by the FDIC the group then provides the OCC with a more detailed business plan reflecting the specifics of the institution or deposit and asset package to be purchased and obtains its final OCC national bank charter concurrently with the closing of its purchase from the FDIC. A Shelf Charter is valid for 18 months and may be renewed thereafter. Monthly reports of any changes in the basic application information will be required.

Nontroubled Institutions

While the OCC announcement focuses on the acquisition of deposit liabilities and performing assets of troubled or failed institutions, the concept of a Shelf Charter could place nonbank investors (including non-US banks not yet approved by the Federal Reserve as bank holding companies) on a more level playing field with existing US banks and bank holding companies in negotiating acquisitions. This equality would arise from the fact that prospective sellers historically have not entertained offers from non-US banking organizations because such offers entail long and uncertain regulatory application-processing periods. The requirement that the directors and senior management of a buying group must undergo extensive and time-consuming background checks by US law enforcement and intelligence organizations has been a particular reason for sellers to avoid nonbank buyers, and the Shelf Charter procedure could in most cases eliminate this problem by having the background checks successfully completed as part of the Shelf Charter application.

New Investor Classes

In the past only existing banks could bid for the deposits of a troubled institution since a bank charter is a legal prerequisite to the acceptance of bank deposits. The OCC correctly notes that its new Shelf Charter procedure should greatly increase the availability of capital to resolve troubled bank situations because it allows nonbank investors to participate. In the past the deposits and performing loans of failing local banks were often assumed by larger banks from elsewhere; it is possible that this Shelf Charter concept will promote the retention of local control of community banks since a local investor group with a Shelf Charter could quickly step in to acquire the deposits and performing loans of a failing local bank.

Federal Reserve Bank Holding Company Aspects

In its release the OCC indicates that it would expect the Shelf Charter organizing group concurrently to apply for Federal Reserve approval of a shell one-bank holding company to serve as 100 percent parent shareholder of the new national bank. Depending on the number, size and nature of the involved investors, one or more of these investors might also have to apply to become bank or financial holding companies. While the Federal Reserve did not join in the OCC's announcement, it is expected that the Federal Reserve has or will reconsider its policy of accepting holding company applications only from applicants that had entered into an agreement to acquire a specific financial institution. Such a change would facilitate the OCC Shelf Charter initiative and would be consistent with recent Federal Reserve actions enlarging the size of noncontrolling private capital investments in US banking organizations (September 22, 2008) and granting certain blanket approvals to private equity firms to invest in up to 15 percent of the voting equity of US banking organizations (December 7 and 21, 2007).

FDIC Deposit Insurance Aspects

In its release the OCC indicates that it would also expect the Shelf Charter organizing group concurrently to apply for FDIC insurance for the new national bank.

Given the "least cost resolution" advantages of the Shelf Charter concept, it is likely that the FDIC would process such applications expeditiously and, if not previously completed, that the FDIC would approve such an application in connection with its award of a purchase and assumption contract to a Shelf Charter bidder.