FDIC Proposes Tightened Capital Rules for Privately-owned Banks

On the same day that regulators shut down seven struggling banks, the Federal Deposit Insurance Corp. proposed new rules governing the acquisition of such banks by private equity firms.

The proposed rules require banks owned by private equity firms to maintain a Tier 1 leverage ratio of 15 percent, lock in their investments for three years, and be generally more open about their financial health than privately run firms prefer.

The FDIC said it was concerned that bank owners “have the experience, competence, and willingness to run the bank in a prudent manner, and accept the responsibility to support their banks when they face difficulties and protect them from insider transactions.”

A major concern is that a privately held bank might stop funding operations in the face of economic hardship. Because the FDIC insures deposits at both privately and publicly held banks, it has a major interest in ensuring that they are being managed for the long haul. More than 50 banks have failed so far this year.

Private equity firms lashed out at the new rules and said that if adopted they would make it less likely that troubled banks would be bought up at all. “I think it could guarantee that there will be no private equity coming into banks,” Wilbur Ross, the head of a private equity group that recently bought Florida-based BankUnited Financial Corp., told the Wall Street Journal.

The FDIC said it was seeking public comment on the proposed rules and “seeks the views of commenters on the appropriate level of initial capital that will satisfy concerns relating to both safety and soundness and the economic viability of the terms of investment in insured depository institutions.”

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