On Thursday, the Federal Deposit Insurance Corp. (FDIC) is expected to propose new guidelines for private-equity investors seeking to buy failed banks. Those guidelines are intended to ensure that these largely unregulated firms don't take too many risks with troubled banks or buy and flip them.
The new rules come as private-equity firms have grown increasingly active in the banking sector. FDIC Chairman Sheila Bair said she's comfortable with the private-equity deals the agency has struck for failed banks such as IndyMac and BankUnited, but that a more structured process needs to be put in place.
Besides a mandatory investment period, the proposal also is expected to require private-equity investors to hold higher capital reserves than traditional banks would be required to hold. There could be a requirement that private-equity investors remain a behind-the-scenes source of capital. And if private-equity firms are required to disclose their other investments to prevent any potential conflicts of interest with the banks they are buying, that would take some of the "private" out of private equity.
The FDIC has to be careful not to scare away private-equity investors from bidding on these banks, as few others are stepping up to help take failed institutions off its hands. Private-equity firms are attracted to these banks because they believe they can acquire them at a discount and minimize the risks through loss-sharing agreements with the FDIC. And private-equity firms such as Blackstone Group and Apollo Management also have large cash reserves that they want to put to work.
The question is whether they will want to play by the FDIC's new rules.
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