The Federal Deposit Insurance Corporation approved a softer set of investment requirements on Wednesday in its quest to expand the pool of eligible and interested investors. The current changes are aimed at bringing in private equity investors, who previously were uninterested in purchasing failed banks due to required capital levels. The FDIC board passed the new guidelines in a 4 to 1 vote.
Under the new guidelines private equity investors will have to meet a Tier 1 capital ratio requirement of 10 percent, which is down from 15 percent proposed earlier. Banks that are bought by private equity groups would need to maintain the capital ratio for at least three years. Capital ratio requirements are meant to ensure a bank can sustain a reasonable amount of losses, without jeopardizing its solvency.
“The Policy Statement strikes a thoughtful balance to attract non-traditional investors in insured depository institutions while maintaining the necessary safeguards to ensure that these investors approach banking in a way that is transparent, long term and prudent,” said FDIC Chairman Sheila Blair in a press release posted on the agency’s website.
From Chairman Blair’s comments, it looks as if the FDIC believes it has found an appropriate policy. “It both protects the interests of taxpayers in a safe and sound banking system, and provides the guidance that investors need to evaluate investments in the deposit operations of failed institutions,” said Blair in the release.
The policy change comes just a day before the FDIC’s quarterly briefing. During the briefing Chairman Blair will announce the remaining balance of the Deposit Insurance Fund along with giving an update to its list of troubled banking institutions.
The troubled bank list hit 305 for the first quarter, the highest level since 1994. The number also marked quite a jump from 252 reported for the fourth quarter of 2008.
The Deposit Insurance fund was reported as having $13 billion at the close of the first quarter. Since that time the FDIC has taken large losses on bank failures such as Colonial Bank and Guaranty Bank, prompting some analyst to speculate the fund will fall into the red before year’s end.
If that were to occur, it would likely prompt the FDIC to borrow funds from the U.S. Treasury for only the second time in its history. The only other occurrence was in the early 1990’s following the savings & loan crisis, which saw 745 financial institutions fail.
