Today, the FDIC Board of Directors authorized the publication of a proposed “Statement of Policy on Qualifications for Failed Bank Acquisitions,” with a request for public comments. As promised in a prior FDIC press release, the Proposed Policy Statement offers guidance as to how private capital investors could acquire or invest in assets and liabilities of failed banks and thrifts. The new guidance imposes stringent requirements on private equity investments in failed banks, and is likely to make it more difficult, and less profitable, for private equity firms to invest in failed banks.
Recently the FDIC has received inquiries from private capital investors interested in purchasing failed depository institutions in receivership. The FDIC wants to ensure that these investors have the necessary “experience, competence, and willingness to run the bank in a prudent manner, and accept the responsibility to support their banks when they face difficulties and protect them from insider transactions.” In a memorandum to the FDIC Board, the FDIC staff concluded that certain private capital investments would not be “appropriate for approval for ownership of insured depository institutions.” Some of these structures include “silo” organizational arrangements, where beneficial ownership cannot be ascertained, decision making parties are not identified, and/or ownership and control are separated. The staff also found that other structures “raise[d] important policy issues” with respect to the necessary requirements needed to obtain FDIC deposit insurance, centering on the need for: adequate capital, a source of financial and managerial strength for the depository institution, and the potential adverse effects of extensions of credit to affiliates. As receiver, the FDIC previously entered into transactions with investors with the resolutions of Indymac Federal Bank and Bank United.
In particular, the Proposed Policy Statement establishes certain standards for bidder eligibility. Of significance, the acquired depository institution must be very well capitalized, with a Tier 1 leverage ratio of 15 percent for at least three years, and thereafter must be “well-capitalized,” supported by bidder commitments to "immediately facilitate restoring" the institution to well-capitalized status. Other bidder qualifications include:
- source of strength commitments from the holding company through which the investors have invested to raise capital for the depository institution as needed;
- agreement to a form of cross-guarantee over substantially commonly owned depository institutions (in which Investors whose investments, individually or collectively, constitute a majority of the direct or indirect investments in more than one insured depository institution would pledge to the FDIC their proportionate interests in each such institution to pay for any losses to the deposit insurance fund resulting from the failure of, or assistance provided to, any other such institution);
- limits on transactions with investors and their affiliates that are far more stringent than those under Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's Regulation W);
- maintenance of continuity of investor ownership for a period of three years after the acquisition;
- strict limits on use of secrecy law jurisdiction vehicles as the channel for investments;
- limitations on existing 10% investors in an institution to bid for its deposits or assets if it failed; and
- commitments to satisfy FDIC disclosure requirements regarding the investors and "all entities in the ownership chain" (including information about fund diversification, return profile, marketing documents, management team and business model).
In her comments on the Proposed Policy Statement, FDIC Chairman, Sheila Bair stated, “I am particularly concerned with new owners’ ability to support depository institutions with adequate capital, management expertise, and a long term commitment to provide banking services in a safe and sound manner. Obviously, we want to maximize investor interest in failed bank resolutions. On the other hand, we don’t want to see these institutions coming back. I remain open minded on many aspects of this proposal, including the categories of investors to whom it should apply, the appropriate level of upfront capital commitments, and the operation of cross guarantee provisions and limits on affiliate transactions.