On Wednesday, the FDIC released new rules (available in PDF here) regarding private equity acquisition of failed banking institutions. From the New York Times:
The Federal Deposit Insurance Corporation board on Wednesday imposed tough new restrictions on private equity firms seeking to buy failed institutions, although they eased more onerous proposals in hopes of luring them to the table.
Facing a dearth of traditional bank buyers, the F.D.I.C. board tried to strike a balance between the need for fresh capital to shore up the banking system, and worries that private equity buyers might engage in aggressive practices that could put its deposit insurance fund at risk. . . .
The rules, which were approved by a vote of 4 to 1, would require private equity-controlled banks to pour enough capital into a failed bank so that it has a cushion of at least 10 percent of its assets for three years. While the industry lobbied hard to reduce that from a 15 percent level originally proposed by the F.D.I.C., it is still twice the minimum level that traditional banks would be required to hold.
The F.D.I.C. also dropped a requirement that private equity firms supply additional capital in the event of a severe downturn, a rule that was vehemently opposed by the industry as impractical. But regulators remained adamant in demanding that buyout firms not sell an acquired bank for at least three years, and imposed restrictions barring the acquired bank from lending to companies affiliated with the private equity buyer.
The agency also inserted a clause that would exempt private equity firms from complying with the higher capital standards if they joined forces with a traditional bank buyer, hoping to encourage such alliances.
In this video, John Kanas criticizes the rules, arguing that they disadvantage private equity buyers relative to other owners, including other private owners, and will result in the FDIC receiving lower prices for purchased assets. He also predicts a new high number for failed banks, 1000 (!) over the next two years. (HT: Paul Kedrosky)
The FDIC also released the second quarter Quarterly Banking Profile yesterday. The highlights:
· Higher Loss Provisions Lead to a $3.7 Billion Net Loss
· More Than One in Four Institutions Are Unprofitable
· Charge-Offs and Noncurrent Loans Continue to Rise
· Net Interest Margins Show Modest Improvement
· Industry Assets Decline by $238 Billion
During the quarter, the number of institutions on the FDIC’s
“Problem List” increased from 305 to 416, and the combined assets of “problem”
institutions rose from $220.0 billion to $299.8 billion. This is the largest
number of “problem” institutions since June 30, 1994, and the largest amount of
assets on the list since December 31, 1993. (See chart, courtesy FDIC Q2 report.) See also this
FDIC Statistics
at a Glance.
Rolfe Winkler has a detailed discussion of the report here:
There’s good news and bad news in the FDIC’s quarterly profile of the banking sector. The good news is that FDIC has more resources than you think to handle the problem banks on its radar. The bad news is that the too-big-to-fail banks aren’t on it.
At the same time, Izabella Kaminska (at FT Alphaville) and Felix Salmon remind that the FDIC “is not bust,” because it has the capacity to borrow from Treasury.
As I’ve said before, the FDIC can’t run out of money. Conceptually, it has simply been faced with a choice up until now — do you raise money from banks, in deposit insurance premiums, before banks start going bust and need an FDIC bailout, or after? Congress made the decision that is should be the latter, when they barred the FDIC from charging such premiums between 1996 and 2006.
Remember that in May:
President Barack Obama . . . signed into law two major housing bills, one of which would allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department to protect the deposits of bank customers.
From Kaminska:
The FDIC published its quarterly banking profile on Thursday, and it appears that while things are certainly pretty dismal (its fund is down to $10.4bn from $13.bn over in the quarter) the agency is not exactly about to go bust anytime soon.
In fact, the agency reckons the fund movement is somewhat irrelevant as it still has the ability to borrow up to another $500bn from the US Treasury.
From the FDIC’s statement (via Kaminska, linked above):
The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions. Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion. Combined, the total reserves of the DIF equaled $42.4 billion at the end of the quarter. Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. “A decline in the fund balance does not diminish our ability to protect insured depositors,” Chairman Bair concluded.
Sheila Bair statement from CNBC:
Related
Posts:
Bank
Failures and FDIC Fund Losses
Bank
Failures Update And Future Problem Banks
Bank
Failures in Historical Perspective
Comments