Squeezed by rising bank failures and alarmed by its shrinking insurance fund, the Federal Deposit Insurance Corp. has made it easier for private-equity investors to buy failed institutions, but one prominent analyst believes that the move could lead to even more shuttered banks.
Squeezed by rising bank failures and alarmed by its shrinking insurance fund, the Federal Deposit Insurance Corp. has made it easier for private-equity investors to buy failed institutions, but one prominent analyst believes that the move could lead to even more shuttered banks.
Yesterday, the FDIC's board voted 4-1 to reduce the cash that private-equity funds must maintain in banks they acquire.
At least in theory, having private-equity investors buy failing banks would allow the FDIC to reduce the losses it would have to cover at a failed bank.
Under the new rules, a buyer would need to maintain capital reserves equal to 10% of the failed bank's assets, down from 15% under an earlier proposal.
That compares with a 5% minimum requirement for banks that buy other banks.
The FDIC has sought to guard against private-equity funds that might want to buy and sell quickly at a profit by requiring the acquiring investors to maintain a bank's minimum capital levels for three years.
Still, the rule change adds risk to the system, said Richard Bove, a bank analyst with Rochdale Securities LLC of Stamford, Conn.
“I think it's a bad idea,” he said. “The problem I have with liberalizing the FDIC rules is that when the commercial companies owned by these firms run into trouble, they will tap into the banks and use bank deposits to bail out the troubled companies. I don't know how you prevent that.”
The increased risk may lead to even more bank failures in the future, Mr. Bove said.
“We are building risk into the financial system for when the next crisis occurs. When that happens, this will cause more banks to go under than otherwise would be the case,” Mr. Bove said.
A dissenting view came from Andrew Boord, bank analyst at Fenimore Asset Management of Cobleskill, N.Y., which has $700 million in assets under management.
“I think it's good news,” he said.
“The more bidders the FDIC has, the fewer losses they will absorb. I don't foresee these private-equity firms turning these into hedge funds with a bank charter.”
Others agree.
“It's a good source of capital that the FDIC needs right now,” said Matt Warren, bank equity analyst at the Chicago-based fund tracker Morningstar Inc.
“It's helpful to have as many buyers as they can and not to try to take on all of the responsibility.”
In the typical bank failure event, the FDIC assumes a significant portion of the risk associated from expected losses by the bank and enters into a risk sharing insurance agreement with the acquirer, he said.
“The failed banks can have expected losses that range from 20% to 60% of total assets,” Mr. Warren said.
Eighty-one banks have failed so far this year, compared with 25 in 2008 and three in 2007, according to the Associated Press.
A spokesman for the FDIC was not immediately available for comment.
Additional reporting from the Associated Press.
