On Wednesday, the FDIC issued a Final Statement of Policy on Qualifications for Failed Bank Acquisitions (“Final Policy Statement”) by private investors seeking to acquire or invest in assets and liabilities of failed banks and thrifts. While the Final Policy Statement does not completely depart from the Proposed Policy Statement issued last month, there are some noteworthy changes reflected in the Final Policy Statement. The accompanying Staff Memorandum made it clear that the intent of the Final Policy Statement is not to interfere with or replace any preexisting regulations of holding companies. The FDIC Board of Directors intends to review the impact of the Final Policy Statement within 6 months of its approval date and will make any necessary adjustments.

The Final Policy Statement will apply to:

  • private investors in a company, including any company acquired to facilitate bidding on failed banks or thrifts that is proposing to, directly or indirectly (including through shelf charters), assume deposit liabilities, or liabilities and assets, from the resolution of a failed insured depository institution; and
  • applicants for insurance in the case of de novo charters issued in connection with the resolution of failed insured depository institutions.

The Final Policy Statement will not apply to:

  • investors of banks or thrifts, or bank or thrift holding companies where the target has maintained a composite Camels 1 or 2 rating continuously for seven years;
  • investors in partnerships or similar ventures with bank where the holding company has a strong majority interest in the resulting institution and an established record for successful operation of insured institutions; or
  • investors with 5 percent or less of the total voting power of an acquired depository institution or its holding company provided there is no concerted action by investors.

Capital Commitment - The Proposed Policy Statement suggested that an acquirer institution should maintain Tier 1 capital of 15 percent at the target institution, but the Final Policy Statement lowered this requirement to 10 percent for the first three years and then requires the institution to be well-capitalized for the remaining period of ownership. If, at any point the institution is not well-capitalized, the institution would have to take immediate action to restore its capital to the 10 percent Tier 1 common equity ratio or the well-capitalized standards, as applicable.

Source of Strength – The Proposed Policy Statement required investors to serve as a source of strength for the subsidiaries of depository institutions. This requirement was omitted from the Final Policy Statement. The source of strength doctrine was a Federal Reserve creation historically that has been adopted in recent actions by the OTS as well in its oversight of holding companies. Removal of the specific reference to source of strength in the Final Policy Statement does not eliminate the need for holding companies to support subsidiary depository institutions. It does, however, eliminate the potential for duplicative application of the source of strength doctrine to holding companies by both the FDIC and the Federal or OTS, as the case may be. Even absent the specific reference, one should assume that the FDIC (and other regulators) will carefully assess the financial resources and stability of proposed investors in failed banks or thrifts.

Cross Support – The Final Policy Statement scales back when cross support would be required. A cross support obligation would apply where two or more depository institutions are owned by a group of investors only if both depository institutions are at least 80 percent owned by common investors. The FDIC may waive this obligation if enforcing the obligation would not reduce the cost of the failure to the Deposit Insurance Fund.

Transactions with Affiliates – The Final Policy Statement prohibits extensions of credit by an insured depository institution to an investor, its affiliates, and investment funds. The Final Policy Statement changes the definition of “affiliate” to mean “any company in which the investor owns, directly or indirectly, at least 10 percent of the equity of such company and has maintained such ownership for at least 30 days.” This change was made to ease compliance and was based on the assumption that very short term investments do not provide a reason for extensions of credit. The Final Policy Statement also requires investors to provide regular reports to the insured depository institution identifying all of its affiliates.

Bidding Eligibility of “Silo” Structures – The Final Policy Statement prohibits ownership structures that typically involve a private equity firm (or its sponsor) that creating multiple investment vehicles funded and presumably controlled by the private equity firm (or its sponsor) to acquire ownership of an insured depository institution. Such structures are intended to remove the ultimate private equity firm and its sponsor from the scope of the Bank Holding Company Act.

Secrecy Law Jurisdictions – The Final Policy Statement, like the Proposed Policy Statement, prohibits investors that operate in jurisdictions without transparency in their regulation of financial institutions. However, the Final Policy Statement responded to commenter requests to clarify the meaning of “bank secrecy jurisdiction.” It is clarified to mean “a country that applies a bank secrecy law that limits U.S. bank regulators from determining compliance with U.S. laws or prevents them from obtaining information on the competence, experience, and financial condition of applicants and related parties, lacks authorization for exchange of information with U.S. regulatory authorities, or does not provide for a minimum standard of transparency for financial activities.”

Continuity of Ownership – The Proposed Policy Statement prohibited covered investors from selling or transferring securities of their holing company or insured depository institution for at least three years after the acquisition. The Final Policy Statement does not change this requirement, but it does add a statement that, in the case of transfers to affiliates, the FDIC approval shall not be unreasonably withheld provided the affiliate agrees to be subject to the same requirements that are applicable under this policy statement for the transferring investor.

Special Owner Bid Limitation – The Final Policy Statement requires that investors that directly or indirectly hold 10 percent or more of the equity of a bank or thrift in receivership will not be eligible to bid to become an investor in the deposit liabilities, assets, of that failed depository institution.