The firms must hold the bank for at least three years before a change in ownership or an initial public offering, maintain a Tier 1 capital ratio of 15 percent and cross- guarantee any future deposit fund losses on any related banks with the FDIC.

While those provisions are under debate within the banking and private equity circles—the FDIC is accepting comments on the proposed rules now—the rules are viewed in some circles as too restrictive for private equity to dive quickly into the distressed banking sector.

“Those rules aren’t going to fly,” MacDonald said. “Those won’t attract firms to the bidding table.”

Panton said his firm is investigating investing in a stronger bank with longer-term prospects for growth, rather than a distressed or failed institution.

He said that “takes a number of banks out of our equation.”

Currently, private equity groups are allowed to create shelf-charters, effectively acting as a bank holding company, to purchase failed bank assets, while not technically operating a bank.

Private equity groups are also allowed to buy as much as a 25 percent stake in banks, and not qualify as a bank holding company. Typically, any investor owning more than 9.9 percent of a bank’s total stock must become a bank holding company.

Regulators relaxed the rules on both last year.

“There are a lot of institutions at attractive prices that will get back to more normal valuations as the market recovers,” Panton said.

Private rules

The FDIC is considering allowing private equity groups to bid on failed banks’ assets, deposits and branches, essentially becoming owners of new banks free of problems. But it comes with some rules attached. The proposed regulations would include:

• Higher levels of capital for the new bank. Under the proposed rules, banks owned by private equity would be required to maintain 15 percent Tier 1 capital, or nearly double the amount for a well-capitalized institution.
• A three-year holding period before the bank was sold or had an initial public offering.
• A cross-guarantee with any other banks held by the firm, insuring the firm would defray costs of another failure, should it occur after the private equity firm buys the bank.

Source: FDIC