FDIC’s Proposed Private Equity Restrictions Hindering Bank Sales

As usual, when the government steps in to the private market they screw things up, and in the case of regulations proposed by the Federal Deposit Insurance Corp., they would essentially stop all interest of private equity firms in buying failed banks, cutting off a major source of capital.

The idea of the banking and other bailouts from the government are part of the problem in the first place, which leads to the latest restrictions. By that I mean when the nanny state refuses to allow a company to fail based on the ridiculous notion that it’s “too big to fail,” you’re going to have a lot of problems, and they’re now being reflected in these misguided efforts.

So in their continuing effort to keep any one from stubbing their toe or falling down and hurting their knee, the FDIC has pretty discouraged any private equity firm from acquiring the assets of failing banks because it wouldn’t be profitable, and the restrictions unrealistic.

You hear that with FDIC Chairman Sheila Bair who said concerning the desired implementation of these restrictions that they were “essential safeguards” when dealing with the private equity firms. She was referring to whether these companies would have enough capital for the banks they acquire and if they could infuse the type management into them to succeed.

Other than not undertanding or getting free markets, the FDIC also is proposing to require the private equity firms wanting to acquire failing banks to have more cash available in the banks than banks today do.

This is probably the biggest hindrance to private equity capital entering into the fray, as the FDIC would insist private equity firms would have to keep capital leverage ratio at 15 percent for the first three years they own the banks. The vast majority of existing banks aren’t even close to that ratio, making it a ludicrous requirement, and one which is unworkable. You come up with a bank’s capital leverage ratio by taking its capital and dividing it by the assets.

Another key sticking point would be the requirement to own any acquired banks for a period of three years, while also being limited in lending to any of the affiliates of the owners.

Both of these desired requirements would have to be changed before private equity firms started investing in the sector.

Having said all this, it could be a negotiating tactic and trial balloon put forth by the FDIC to test the waters and see how much they can get away with when working with private equity firms.

If that’s the case, the private equity companies should hold their cards close to their chests and not reveal anything on how far they’re willing to go. Private equity doesn’t need the FDIC or banks, but the banks and FDIC need them.

Either way, this is a waste of time when the banking and lending industry needs private capital in a big way.

With 77 banks having failed already this year, and many more to come, the FDIC needs to get out of the way of private capital and let the market take care of itself.