FDIC Allows Private Equity Firms to Buy Failing Banks

The Federal Deposit Insurance Corp. board of directors has approved a policy statement that will allow private equity firms to purchase failing banks and thrifts provided they operate the new institution for at least three years and maintain a 10% capital ratio. The FDIC originally proposed a steeper 15% capital requirement, which is three times the normal level for a bank. But it was reduced because of concerns the higher capital requirement would scare private investors away and increase FDIC's bank resolution costs. Comptroller of the Currency John Dugan noted that the FDIC has already realized savings of $1 billion by selling two failed institutions to private investors. Mr. Dugan voted for the policy statement due to the reduced capital requirement and because FDIC chairman Sheila Bair agreed to review the policy's impact after six months. The FDIC chairman stressed that higher standards should be required for investors who don't have a proven record of operating banks and because of the "generous" loss sharing arrangements the FDIC is providing investors to acquire troubled assets. The FDIC has taken more than 81 failed banks this year at a cost of $20 billion to the insurance fund.