FDIC Rescinds Failed Bank Acquisition Policy Restricting Private Equity Ownership of Failed Banks
Commentary by Thomas Delaney
The Federal Deposit Insurance Corporation ("FDIC") rescinded its Statement of Policy on Qualifications for Failed Bank Acquisitions and related interpretive questions and answers.
The Statement of Policy, issued in September 2009 with related questions and answers published in 2010, was intended to provide guidance to private capital investors seeking to acquire the deposit liabilities, or both the liabilities and assets, of failed banks. It required such investors to satisfy extensive conditions before becoming eligible to bid on failed institutions, including (i) capital standards not applicable to other acquirers; (ii) requirements to enter into cross-guarantee agreements with commonly controlled depository institutions; (iii) stricter limits on affiliate transactions than those imposed under Sections 23A and 23B ("Reg. W: Transactions between Member Banks and Their Affiliates") of the Federal Reserve Act; and (iv) lengthy continuity of ownership requirements.
The FDIC determined that these requirements were more restrictive than necessary and introduced additional uncertainty for nonbank investors in the acquisition process, as the policy imposed additional requirements on private capital investors. As a result, the FDIC found that the policy may have discouraged and limited private capital investment in the "resolution of failed depository institutions," potentially restricting the availability of significant capital and increasing the cost of resolutions and risk to the Deposit Insurance Fund.
The FDIC further explained that recent bank failures in 2023 demonstrated the need for a more flexible and proactive approach to resolutions. The FDIC recognized that nonbank entities, including private equity firms, can play a significant role in the resolution process due to their ability to quickly deploy substantial capital. The FDIC stated that rescinding the policy is intended to improve the ability of such investors to participate in FDIC resolution processes.
The rescission is effective upon publication in the Federal Register.
Commentary
This action is more than a mere rescission of a policy statement. In his role as Deputy Chairman of the FDIC during the failure of Silicon Valley Bank, now Chairman Hill expressed concern about inefficiencies in the process that existed for marketing failed institutions to potential buyers. At the time, he identified a need for greater transparency and timeliness with respect to data concerning failed institutions, so that bidders and the FDIC could better understand and price the liabilities they may take on. He also indicated that resolution costs were driven up because the pool of potential buyers was essentially limited to existing banking organizations. At the time, he argued for a process of preclearing potential acquirers that would broaden the bidder pool to potentially include private equity funds.
The Statement of Policy reflects Mr. Hill’s long-term thinking on the subject of resolving failed banks and opens the door for nontraditional bidders to be acquirers. It will be interesting to see whether the FDIC issues additional guidance with respect to PE bidders and, relatedly, shelf charters. In this regard, Chairman Hill has recently stated that the FDIC is exploring with the other regulators the possibility of an emergency exception to allow for the rapid establishment of a shelf charter to facilitate bidding on a bank following a sudden failure.