The FDIC is already short on cash, using more than $21 billion so far to backstop the troubled banking system. And there’s almost surely more money needed as banks continue to fail.
With the agency looking for a capital infusion, private equity firms looking to buy troubled banks — like Blackstone, Carlyle and J.C. Flowers — seem like a perfect match.
But despite a compromise, new FDIC rules may make selling distressed banks more difficult. Sheila Bair & Co. are leery of aggressive, short-term practices by PE firms that could increase bank risk and further deplete the agency’s funds.
New York Times: So far, regulators have allowed only a few groups of private equity firms to take over failed banks, including IndyMac Bank of California and BankUnited of Florida, with assurances that experienced bankers would run the operations.
Private equity firms said the new rules would make them less likely to buy a failed institution on their own. However, a few special exemptions are intended to encourage them to team up with a bank partner or a large group of private investors — strategies often considered last resorts because they must give up control and profits.
Private equity firms are used to working between regulatory rules to garner big profits. But new FDIC rules, even though less onerous than originally planned, aren’t what the investment houses are used to:
New York Post: One gripe centres on a provision that buyout shops must maintain capital of at least 10 per cent of the target bank’s assets for three years. While that capital requirement is down from an original proposal of 15 per cent, some would-be buyers noted the new figure is still twice what traditional banks are required to maintain.
To most P.E. honchos, having capital just sitting around in a reserve seems deeply wasteful. You can imagine that they are looking for loopholes right now.
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