August 19, 2009 / 7:32 PM / 8 years ago

FDIC to vote Aug 26 on private equity rules

WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Deposit Insurance Corp will meet next week to vote on a proposed policy that would force private equity groups to maintain high capital levels and put a large amount of their own money at stake when investing in failed banks.

The FDIC provoked a backlash when it proposed the guidelines in July and is expected to soften the policy when it meets August 26. The meeting’s agenda was posted to the FDIC website on Wednesday, but provided few details on the specific proposals.

Some investors and regulators said earlier that the proposed rules were too harsh and would quash the interest of private equity groups at a time when the FDIC is trying to court investors for an increasing number of failed banks.

FDIC Chairman Sheila Bair defended the proposals, saying strong capital requirements and other provisions should be imposed to ensure the safety and soundness of the banks.

But she also said she was open to industry input on whether the guidelines would scare away potential investors, and modified rules could be considered.

At next Wednesday’s meeting, the FDIC will also consider whether to extend its transaction account guarantee program and a rule about the capital cushions banks must hold when they bring off-balance-sheet entities back onto their books.

As first proposed, the private equity guidelines would make investors maintain capital at troubled banks at levels that exceed current regulatory standards for “well capitalized” institutions.

It would require a Tier 1 leverage ratio of 15 percent, for three years. Private equity groups would also have to maintain the investment in a bank for three years, unless they get special approval from the FDIC.

Industry sources expect that to be reduced to about 10 percent when the guidelines are finalized.

Another rule that has caused concern says investors would be expected to serve as a “source of strength” for their subsidiary depository institutions. That would mean the private equity group would be responsible for adding more funds into the bank if it continued to struggle.

That requirement is also expected to be modified, industry sources have said.

Bank regulators are increasingly looking to nontraditional investors to nurse failed banks back to health as the number of failed institutions continue to rise, draining the FDIC’s deposit insurance fund.

CAPITAL NEED

The FDIC will also vote on whether to expand a government program that guarantees transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

That program was launched in October to boost confidence in the banking industry, add more liquidity and reduce the risk of bank runs.

Further, the agency will propose a rule about the capital impact of an accounting change that will force banks to bring more than $1 trillion of assets back on their books.

On January 1, 2010, banks will have to move off-balance-sheet entities on to their financial statements, which will affect their capital levels and leverage ratios.

Banks have traditionally used off-balance-sheet vehicles to avoid reporting requirements or to reduce the amount of capital they needed to hold to satisfy regulatory requirements. As the financial storm gathered, uncertainty about some of those vehicles helped undermine confidence in banks and accelerated the financial crisis.

The Financial Accounting Standards Board finalized rules earlier this year to force banks to move these obligations onto their books, and provide more disclosure than just footnotes that currently provide scant information to investors.

The Federal Reserve, during a recent “stress test” of the largest 19 U.S. banks, said the change could mean about $900 billion in assets being brought onto the books of those firms.

(Additional reporting by Megan Davies in New York)

Reporting by Karey Wutkowski. Editing by Robert MacMillan, Leslie Gevirtz

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