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FDIC Issues Finalized Policy Statement on Failed Banks

In July, the FDIC solicited public comments on a proposed policy statement regarding failed bank acquisitions. This policy statement defined new regulations applicable to certain investors of failed banks, with respect to:   

•    Capital commitments
•    The investor’s role as a source of strength for the acquired institution
•    Cross guarantees
•    Affiliate transactions
•    Secrecy law jurisdictions
•    Continuity of ownership
•    Disclosures


The FDIC received 3190 form letters in support of the policy changes and 61 individual comment letters. A common observation among these comments was that the new requirements would impede the flow of private capital into the banking industry. Specifically, commenters found the 15 percent Tier 1 leverage ratio, the source of strength requirement, and the cross guarantee requirement to be particularly restrictive. Commenters argued that these provisions would competitively disadvantage the banks acquired by private investors. Given this disadvantage, private investors would be more likely to:

•    stay out of banking altogether, or
•    engage in aggressive business activities after the acquisition has closed.

Commenters also noted that private equity fund agreements typically prohibit source of strength and cross guarantee commitments as described by the FDIC’s proposal. The cross guarantee requirement is particularly distasteful because it would require the investor to risk unrelated and legally separate assets.

Provisions that keep private capital out of the banking industry would ultimately impact the DIF negatively, if the result is a greater number of bank failures.

Other commenters, however, supported the increased restrictions on private equity firms, citing the need to keep risky behavior out of the banking system.  

Final provisions

In consideration of the comments, the FDIC affected several changes to the proposed policy statement, including the following hot points:

•    Clarification regarding the firms to which the policy statement applies. The policy statement will not apply to investors in partnership with depository institution holding companies, where the holding company has “a strong majority interest in the acquired bank or thrift and an established record for successful operation of insured banks or thrifts.” Investors holding no more than 5 percent of total voting power are also excluded.
•    Reduction of initial capitalization requirements. The acquired bank must now open with a Tier 1 common equity/total assets ratio of 10 percent. And, this minimum ratio must be maintained for three years.  
•    Removal of the source of strength requirement.
•    Narrowing of the cross guarantee provision. Cross guarantees will only be required when the affected investor group owns more than one institution and those institutions are at least 80 percent owned by common investors.
•    Update to the definition of “affiliate” with respect to affiliate transaction provisions. The final statement defines “affiliate” as: “any company in which the Investor owns, directly or indirectly, at least 10 percent of the equity of such company and has maintained such ownership for at least 30 days.”

Read the summary of comments and complete list of changes made to the final policy statement here:


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