On August 26, the Federal Deposit Insurance Corporation (FDIC) issued its long-awaited final policy statement on corporate acquisitions of failed institutions. The final policy statement was issued by the FDIC after its proposed policy statement, issued on July 9, was the subject of criticism by potential investors for creating an unlevel playing field vis-à-vis banks and holding companies. Particularly criticized were requirements in the proposal that new investors wishing to purchase a failed bank from the FDIC put up 15% Tier 1 capital for a period of three years, that investing companies serve as a “source of strength” to the institution acquired, and that any investor with a majority interest in an acquired institution that owned another institution cross-guarantee, via a pledge of stock, their interest in each institution to cover losses to the Deposit Insurance Fund caused by the failure of such insured depository institution.

In the final policy statement, the Tier 1 requirement was lowered to 10% Tier 1 capital for three years, the source of strength requirement was removed, and the cross-guarantee trigger was raised to 80% instead of a majority ownership requirement. Other notable requirements include the following:

  • After application, the policy statement will no longer apply to an institution that has maintained a Camels rating of 1 or 2 for seven years.
  • The policy statement will not apply to holding companies with a strong track record of successful institution management.
  • The policy statement will not apply to investors that own 5% or less of the voting power of the company.
  • All extensions of credit to investors will be prohibited.
  • Investors utilizing entities that are domiciled in bank secrecy jurisdictions will not be eligible to own a direct or indirect interest in an insured depository institution unless they are otherwise subject to comprehensive consolidated supervision.
  • Investors will be prohibited from selling or otherwise transferring their securities for a three-year period.
  • Complex and functionally opaque ownership structures (known as Silos) will be unacceptable.

The final policy statement was reportedly a compromise between Comptroller of the Currency John Dugan and Office of Thrift Supervision Acting Director John Bowman, on the one hand, who argued that new investors should not be unduly penalized compared to other potential acquirers, and other members of the FDIC board, including Chair Sheila Bair, who favored tighter controls given a lack of supervisory history with new entrants into the industry.

It remains to be seen whether the final policy statement will induce significant new investment in failed institutions, or whether potential entrants will seek higher returns elsewhere.

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