FDIC proposal lays down stringent rules for private equity investments in failed

The FDIC recently issued a proposed policy statement which appears to be primarily focused on structures used to acquire failed banks involving multiple investors – typically private equity funds – where no investor would be considered to control the bank going forward for regulatory purposes. Thus, the investors minimize the amount of regulation to which they would be subject. The proposed policy statement would impose a number of new restrictions on the following types of structures:

• Capital Support
• Source of Strength
• Cross Guarantee of Affiliated Institutions
• Bar on Affiliate Transactions
• Bank Secrecy Law Jurisdictions
• Minimum Holding Period
• Ability of Existing Investors to Bid on a Failed Depository Institution
• Extensive Disclosure.

Given the apparent scarcity of purchasers of failed banks, it is a difficult time to place higher capital and other standards on acquirors of failed banks and the proposed policy statement will generate significant debate. The fact that the FDIC offers these mitigants in selling failed banks is part of the reason for the proposed new requirements. In its present form, the proposed new restrictions, when combined with the existing regulatory restrictions applicable to private equity investments in banks, may effectively inhibit private equity interest in acquiring failed banks. As a result, both the formation of new private equity structures and roll-up strategies by existing private equityowned banks may be negatively impacted.