FDIC Crafting Guidance for PE Bank Investments

(Reuters) – The Federal Deposit Insurance Corp, the U.S. agency that seizes failed banks, is crafting guidance on the role private equity firms can play when investing in troubled institutions, FDIC Chairman Sheila Bair said on Wednesday.

“We’re going to be working on some generic guidance to help provide clarity about … nontraditional acquirers of banks such as private equity, their appropriate role and how their bidding process needs to be structured,” Bair said in an interview with CNBC.

“And the ownership structure needs to be maintained to make sure they will be a source of strength for the bank.”

Her comments were made after firms including WL Ross & Co, Carlyle Group [CYL.UL], Blackstone Group (BX.N) and Centerbridge Partners last week agreed to put up $900 million of capital to rescue BankUnited FSB, a troubled Florida lender.

When a bank fails, the FDIC and its primary regulator try to nurse it back to health. If that fails, the FDIC tries to find a buyer through a competitive bidding process in an attempt to minimize the cost to the federal deposit insurance fund, used to guarantee up to $250,000 per depositor.

“I am comfortable with the transactions we’ve done so far but I think we need to have some guidelines in place,” Bair said during a quarterly briefing on the state of the banking industry for the first quarter.

Bair said she wants the right balance between safety and soundness for the troubled institution and a real commitment from investors to run the bank in a prudent manner.

“We also want people coming in buying banks who are committed to being good banking citizens, good corporate citizens, and understand the regulatory culture of banks,” she said at the briefing.

“I think we have hit that balance so far but I think some generic rules in place would help everybody.”

With more than 300 banks on the FDIC’s list of problem institutions, the insurance fund dwindling and an increase appetite from private investors, the agency is expected to try to issue guidance as quickly as possible.

One of the main obstacles may be how regulators determine the meaning of control, especially with a regulatory threshold of 25 percent of voting power deemed to be in control.

Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association trade group, said some investors could hold more than a 25-percent stake but not be considered to be in control.

“Equity investment is going to be a much more important way of investing in financial institutions going forward,” he said. “Those are all the issues they need to figure out as to what is control and effect.”

During the CNBC interview Bair also said regulators want a thorough review of the capabilities of the management at banks that recently underwent a government stress test for extreme economic conditions.

“We want a rigorous review of management capabilities,” she said. (Reporting by John Poirier; Editing by Steve Orlofsky, Phil Berlowitz)