FDIC Moving Fast on Private Equity Rules

NEW YORK (Reuters) – A U.S. bank regulator is expected to move quickly in finalizing guidelines on private equity investments in failed banks, possibly easing one of its most controversial proposals, sources said on Monday.

The rules could be finalized as soon as this month and could see a key measure that is being proposed for banks to be bought by private equity, the Tier 1 leverage ratio, reduced from a proposed 15 percent to around 10 percent, industry sources said.

Uncertainty over the Federal Deposit Insurance Corp’s rules has stalled plans by investors to buy banks, and slowed some deals already in the works, sources previously told Reuters. For more details [ID:nN31427735]

That means that finalizing the rules has some urgency.

Two sources familiar with the process said on Monday that the FDIC could come out as early as this month with the rules in order to kick-start investment in the sector. One source said the rules could come mid-August to mid-September.

The FDIC said it “does not discuss proposals during the comment period.”

The agency, which provoked a firestorm when it produced stringent guidelines for private capital investment in troubled banks in July, has been taking comments before issuing a final proposal. The comment period ends Aug. 10, according to the FDIC’s website, and has already drawn sharp remarks from those in the industry.

“Our primary concern is that the FDIC proposal in its current form will deter substantial, potentially available and much needed private investment rather than deter the sole profit motives of a minority of private equity firms,” said restructuring advisors Alvarez & Marsal in a letter dated July 30, posted on the FDIC website on Monday.

Still to be issued is an opinion from the Private Equity Council, which represents the large private equity firms.

The bank regulator is trying to reach a middle ground with private equity leaders because they represent a crucial source of capital as the United States tries to resuscitate its struggling banking industry.

The biggest complaint from the industry has been that the guidelines call for a Tier 1 leverage ratio — the ratio of a bank’s capital to its assets — of 15 percent for three years, far higher than the 5 percent required of well-capitalized banks.

It is widely expected that will be relaxed. Industry sources expect the figure to be reduced to about 10 percent.

Private equity executives have argued that if the rules go through as proposed, it will be more expensive for them than for a strategic bidder such as a well-capitalized large bank, to buy a failed bank. This is because the targeted bank would have to maintain a higher capital ratio if bought by private equity than by a bank.

Another issue which could come into discussion is possibly concentrating on a measure known as the common equity ratio rather than the Tier 1 leverage ratio, one source said.

Tangible common equity (TCE) is the amount of common equity supporting a company, ignoring intangible assets such as goodwill, on the theory that in bad times, intangible assets are less likely to have value

By Megan Davies
(Additional reporting by Rachelle Younglai in Washington and Paritosh Bansal in New York; Editing by Phil Berlowitz)