FDIC to Soften Private-Equity Curbs

By DAMIAN PALETTA and DAVID ENRICH
WASHINGTON -- In an attempt to attract more buyers for failed banks, the Federal Deposit Insurance Corp. is expected next week to soften its proposed restrictions on private-equity firms buying collapsed lenders, according to people familiar with the matter.

While FDIC officials are still hammering out details of the final rule, the agency is expected to back away from aspects of its July proposal, including a requirement that buyout firms that bid on failed institutions maintain much-thicker capital cushions than banks, these people said.

Private-equity firms and some bankers have complained that the FDIC's proposed restrictions were unnecessarily onerous and would deter private investors from bidding on failed banks.

The FDIC's anticipated softening of the proposed rules comes as the agency grapples with a major wave of bank failures, with both large and small banks buckling under the strain of soured loans and bad investments. Seventy-seven banks have failed so far this year, compared to 25 in 2008.

Some recent auctions of failed banks have suffered from lackluster interest from would-be buyers, according to people who have participated in the bidding. Private-equity firms have bid in a number of FDIC auctions, including for Colonial Bank, a unit of Colonial BancGroup Inc., Montgomery, Ala., and Guaranty Bank, part of Guaranty Financial Group Inc., based in Austin, Texas.

But the buyout industry so far has scored few victories. One exception was the sale of BankUnited FSB, Coral Gables, Fla., in May to a group led by W.L. Ross & Co.

The FDIC's five-member board is expected to vote on the rules governing private-equity investments at a meeting Wednesday. An FDIC spokesman said the board hasn't made a final decision.

The FDIC is expected to retreat from its July proposal that private-equity firms have a Tier 1 capital ratio of at least 15% in order to bid on failed banks, and instead require such investors to maintain ratios of at least 10%, said the people familiar with the matter. It isn't clear whether that 10% threshold will be in the form of Tier 1 capital or another type of capital. The capital requirements for these investors are still expected to be slightly higher than those normal banks would have to maintain.

The FDIC also is expected to ease parts of its proposal that would have required buyout firms to guarantee that they'd provide financial support to any of their banking subsidiaries. Private-equity firms were fiercely opposed to those so-called "source of strength" and cross-guaranty provisions.

The FDIC's planned rules aren't expected to be completely watered down. Buyout firms are still expected to complain about mandates that they hold on to bank charters for at least three years, which would constrain the firms from turning quick profits on the deals.

Government officials have been trying to strike a balance between luring more capital into the banking industry and not putting banks in the hands of investors who might promote risky lending practices or ditch the bank charters after just a few months if returns aren't high enough.