Publications

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The Board of the Federal Deposit Insurance Corporation has authorized publication of its Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions (Statement).

The Statement sets forth certain standards for bidder eligibility in connection with the resolution of failed insurance depository institutions that would affect the way private equity and other investors acquire a stake in the entities in question. To read the Statement, as well as the FDIC’s press release and Chairman Sheila Bair’s statement concerning this document, please click here.

Although the Statement, announced on July 2, 2009, does not, by its terms, address investments in non-troubled institutions or entities that have not been placed in receivership, these provisions are indicative of the approach that may be followed by the FDIC more generally in the context of these other investments. The Statement sets forth criteria that include:

• capital support of the acquired depository institution;
• agreement to a cross guarantee over substantially commonly owned depository institutions;
• limits on transactions with affiliates;
• maintenance of continuity of ownership;
• clear limits on secrecy law jurisdiction vehicles as the channel for investments;
• limitations on whether existing investors in an institution could bid on it if it failed; and
• disclosure commitments.

Each of these factors will be analyzed and the implications for private equity investments will be considered, particularly in light of the FDIC’s request for comments concerning the Statement to be received from interested parties during the forthcoming 30 days (starting from the date of the Statement’s publication in the Federal Register).

Key Elements of the Statement

Capital Commitment: An investor group in a failed institution will be required to agree to cause the depository institution acquiring deposit liabilities, or such entity’s assets and liabilities, from a failed depository institution in receivership, to be initially capitalized at a minimum 15 percent Tier 1 leverage ratio for a period of three years, and to maintain a “well-capitalized” standard for such institution throughout the period of time such group maintains an ownership interest in such entity.

Source of Strength: Investor “organizational structures” taking equity positions subject to the scope of this new Statement would be required to agree to serve as a “source of strength” for the depository institutions in which they have invested. This would include a commitment by any entity (holding company or other vehicle) through which such investors hold their positions to sell equity or engage in capital qualifying borrowing to honor this commitment to provide support to the depository institution in question.

Cross Guarantees: Investors that, individually or collectively, constitute a majority of the direct or indirect investments in more than one insured depository institution will be required to pledge to the FDIC their proportionate interests in each such institution, as a potential source of reimbursement of any amounts of loss to the FDIC’s Deposit Insurance Fund caused by the failure of, or assistance provided by the FDIC to, any such other institution. While 12 U.S.C. Section 1815 (e) creates a cross guarantee among affiliates of a depository institution, including other banks or thrifts held under common control with the troubled entity, this new standard set forth in the Statement has the potential, given its breadth, to apply to those individual investors that may not, taken separately, control or be under common control with a failed depository institution, but that may otherwise be deemed to constitute a part of a group that has taken such a position. For example, it is possible that so-called “club” deals, in which a group of private equity firms each acquire a “passive” investment in a troubled bank or thrift, may be deemed to be acting “collectively” for this purpose and to be subject to cross-guarantee liability if the same “club” group were to invest in another such troubled banking entity.

Transactions with Affiliates: All extensions of credit, as that term is broadly defined in 12 C.F.R. Section 223.3(o), by the failed entity in which the investment is effectuated, to the investors, their respective investment funds (if any), any affiliates thereof, as well as any portfolio companies, would be absolutely prohibited. For purposes of these prohibitions, an affiliate will be deemed to include any entity in which an investor owns 10 percent or more of the equity of that company.

Secrecy Law Jurisdictions: Ownership vehicles established by investors in bank secrecy jurisdictions would be ineligible to own a direct or indirect interest in an insured depository institution, absent, among other things, a commitment or the existence of comprehensive consolidated supervision for the investor group in question, as well as a consent to provide information to federal banking regulators, consent to jurisdiction in the United States and agreement to be bound by the statute and regulations administered by such pertinent federal banking regulators.

Continuity of Ownership: Investors in the failed bank or thrift in question would be prohibited from selling or otherwise transferring securities of the investors’ holding company or of the underlying depository institution for a three-year period of time following the acquisition of the pertinent entity.

Special Owner Bid Limitation: Investors that hold, directly or indirectly, 10 percent or more of the equity of a bank or thrift in receivership, would be ineligible to bid on becoming an investor with reference to the deposit liabilities, or both such assets and liabilities, of that failed depository institution.

Disclosure: Investors will be required to submit to the FDIC complete information concerning the investor group as well as all entities in the ownership chain, including the size of the capital fund or funds involved in the proposed acquisition, the return profile, the marketing documents, the management team and the business model. The Statement expressly provides, as well, that additional requirements may be imposed in connection with the general character, fitness and expertise of management, the need for a thorough and reasonable business plan, satisfactory corporate governance structures, as well as any other supervisory matter deemed pertinent by the regulator in question. In this regard, although the Statement does not provide many details, there is a general introductory provision dealing with so-called “silo-structures,” to the effect that these would not be eligible bidders for failed bank assets and liabilities. In broad terms, the FDIC identified these structures as ones in which beneficial ownership is unclear, those responsible for making managerial and strategic decisions are not clearly identified, and ownership and control are not aligned. At present, private equity and other investors have structured their holdings in order to invest in an entity that would be registered as a bank holding company, with its attendant consequences for limitations on activities and for capital adequacy, without imposing such a registration status on each such ultimate investor. The viability of these structures in the context of the FDIC’s proposals for acquisitions of interests in failed banks and thrifts is very much in doubt under the provisions set forth in the Statement.

Next Steps

The FDIC has noted that the plan set forth in the Statement is open for comment for 30 days.

We will continue to monitor developments on this topic and to advise on steps that may be taken to amend and to finalize the policies contained in the Statement.

For more information on the Statement, please contact:

Richard Coll

Rusty Conner

Andrew Eskin

James Kaplan

Megan Kraai

David Krohn

Michael Reed