Regulators ARE NOT Making It Easier for PE Firms To Own Banks

Did you read your New York Times yet this morning? If so, you might have seen a B1 story about next week’s FDIC vote on rules governing private equity investment in banks. It begins:

“Faced with a growing wave of bank failures, the Federal Deposit Insurance Corporation is taking extraordinary steps to attract buyers for troubled institutions to keep the fund that makes depositors whole from being drained. Federal regulators are planning next week to make it easier for private equity firms to buy insolvent lenders, according to people briefed on the situation, a move that would reduce the number of failed banks that the fund would have to support…”

Wow. The FDIC must have done a massive turnaround. Last I checked, it had proposed all sorts of rules to make it tougher for PE firms to invest in banks. Now it’s apparently scrapped all that, and thrown in a few tasty carrots for good measure…

But there’s one giant caveat: The NY Times reporter doesn’t have a clue what he’s talking about (neither, apparently, do his editors).

The FDIC originally proposed a sweeping set of rules that would have made it much more difficult – or at least less appealing — for PE firms to invest in banks. What FDIC reportedly will vote on next week is a scaled back version of that proposal, but it’s hardly going in the reverse direction. The rules it is expected to enact next week will still make it harder/less appealing for PE firms to invest in banks.

For example, the final rule is expected to require a Tier 1 leverage ratio of 10% for three years. That’s lower than the 15% originally proposed, but still higher than the 5% requirement for non-PE-owned banks.

Need an analogy? Imagine I’m playing high school baseball, where the typical pitches are around 60-70 MPH. I know the other team has relievers who throw 80MPH and 90 MPH, so I’m relived when the 80 MPH hurler comes in rather than the 90 MPH one. It’s better than the worse, but still worse than status quo…