FDIC Issues Proposed Policy Statement on Qualifications for Failed Bank Acquisitions

By W. Bernard Mason

On Thursday the FDIC Board authorized publication of a proposed statement of policy on qualifications for failed bank acquisitions. This proposed policy statement would provide guidance to private capital investors interested in acquiring or investing in failed insured institutions regarding the terms and conditions for such investments or acquisitions.

The FDIC notes that private capital investors have indicated interest in purchasing insured institutions in receivership. The FDIC recently completed two such resolution transactions involving new private capital investors, stating that the bids from these investors were the least costly to the Deposit Insurance Fund (DIF).

In considering private investments in failed institutions, the FDIC states that it must carefully weigh the potential contribution that investors could make to strengthening the capital position of these banks and the statutory and regulatory framework aimed at: (a) maintaining well capitalized banks; (b) support for these banks when they face difficulties; and, (c) the protections against insider and affiliate transactions. Capital support and management expertise are essential considerations.

These proposed guidelines would apply to: (a) private capital investors in a company that is proposing to directly or indirectly assume deposit liabilities from a failed insured institution in receivership; and (b) applicants for insurance in the case of de novo charters issued in connection with the resolution of failed depository institutions. Under the proposal, these investors would be required to maintain a minimum 15 percent Tier 1 leverage ratio for a period of at least three years; thereafter, the institution’s capital could not decline below the “well capitalized” level during the investors’ ownership. A contractual cross guarantee would be required for commonly owned depository institutions. There would also be a prohibition on extensions of credit to investors, their funds, affiliates, and portfolio companies. Investors would also be required to maintain continuity of ownership through a prohibition on the sale or transfer of their interest in the acquired or de novo institution or its parent holding company for a period of three years. Investors holding ten percent or more of the equity of a bank in receivership would not be eligible to bid to become an investor in that failed institution. Finally, investors generally would be expected to avoid secrecy law jurisdiction vehicles as the channel for their investments.

The FDIC Board is clearly wrestling with how best to encourage private investor interest in acquiring failing institutions while protecting the institution and the DIF from undue risk. Board Member John Dugan expressed his concern that the proposed guidelines may be too onerous, but recognized that some restrictions and limitations were essential. Chairman Sheila Bair stated that the FDIC does not want to see these acquired institutions fail again due to the nature of the acquisition.

The proposed Federal Register document provides the FDIC’s support for each of these provisions, and will be published for a 30-day comment period.