FDIC Raises Barriers for New Entrants to Banking Industry
By: Sean P. Mahoney
After a few high-profile investments in banking organizations by private equity firms, the FDIC appears to be rethinking its policies on new entrants into the banking industry. This trend is evidenced by two recent FDIC pronouncements indicating the regulator’s increased scrutiny of certain private equity acquisitions and more strict limitations on the business activities of certain newly created banks.
The FDIC’s Final Statement of Policy on Qualifications for Failed Bank Acquisitions (the “Policy Statement”) (issued August 26, 2009 and available here), relates only to acquisitions of failed banks by private equity firms, including acquisitions made through the use of a new charter from any regulator. Although the Policy Statement generally does not extend to transactions outside the context of FDIC conservatorship or receivership, it may also extend to so-called “inflatable charters” or small banks acquired to facilitate the acquisition of failed institutions. Nevertheless, it contains a number of burdensome provisions that apply only to the acquisition of failed banks by private equity firms, but not to other acquirers. These provisions include:
- a requirement to maintain the bank’s Tier 1 common equity ratio at 10% or more for three years following the acquisition;
- prohibitions on the acquired bank extending loans to any of its private equity investors or any entity in which any such investor owns 10% of the equity;
- a prohibition on silo ownership structures (e.g., structures with parallel ownership between the bank and a private equity fund); and
- a requirement that the private equity investor commit to hold its investment in the bank for three years or more.
At the same time, the Policy Statement may create artificial barriers to entry and competitive imbalances among private equity firms, as the FDIC reserved authority to exempt from the Policy Statement investors that have held investments in banks that retain one of the two highest examination ratings for a period of seven or more years. In other words, certain experienced bank investors may not be subject to the more stringent standards contained in the Policy Statement.
The FDIC also recently issued “Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions,” FIL-50-2009 (the “Enhanced Supervisory Procedures”) (issued August 28, 2009 and available here). The Enhanced Supervisory Procedures impose increased regulation upon investors who enter the banking industry for the first time by forming new state-chartered banks. The Enhanced Supervisory Procedures apply only to de novo FDIC-insured state banks, and not to de novo national banks or federal savings banks.
While all de novo banks are required to conduct their first three years of operations within the bounds of a business plan submitted to regulators as part of the chartering process (during which time they are subject to more frequent examinations), the Enhanced Supervisory Procedures expand that period to seven years for newly formed state banks that have the FDIC as a primary regulator.
Although the Policy Statement and Enhanced Supervisory Procedures do create new barriers, they also provide a regulator-sanctioned framework for private equity firms to bid on failed institutions. It remains to be seen whether such barriers are significant enough to deter private equity investors.
