WASHINGTON — Just a week after the Federal Deposit Insurance Corp. unveiled its plans to restrict private-equity bank owners, investors expect the agency to slice the required capital amounts nearly in half.
"I am encouraged that the agency will reconsider the guidelines that they put forward," said Wilbur Ross, the chief executive of W.L. Ross & Co., who attended a closed-door roundtable the FDIC hosted Monday.
"I have no idea exactly to what number" the FDIC will lower the capital requirements, "but … there is some logic to an 8% figure."
That would be just under half of what the agency proposed on July 2: a minimum Tier 1 leverage ratio of 15% for private-equity investors who buy failed banks.
But Ross noted that start-up banks are only required to hold 8%.
"It seems to me it's impossible for anyone to think that a start-up bank is less risky than a bank that's been all cleaned up, has had everything marked to market and where the toxic assets are part of a loss-sharing agreement with the FDIC," he said.
Patricia McCoy, a law professor at the University of Connecticut who also attended the FDIC's meeting, agreed the agency is likely to back off the capital requirement.
"The FDIC listened very hard to the concerns raised about the Tier 1 leverage ratio, and was willing to rethink its position," she said.
But how far, or when, the FDIC will pull back is unclear. The proposal was issued for comment this week, and the public still has nearly a month to weigh in.
Some sources left open the possibility that the FDIC could leave the capital ratio at 15% and instead ease other aspects of the plan.
Karen Shaw Petrou, a managing partner of Federal Financial Analytics Inc., said the capital requirement is similar to another proposed restriction — that private-equity investors who already have majority interests in other banks pledge to cover losses to the FDIC if one of their institutions fails. She said both elements ensure a strong parent company, and therefore one could be altered.
"Those two provisions are a classic belt-and-suspenders," she said. "I would expect you would see either one of them eased or eliminated, and the other kept as is or strengthened. They each reach to the same goal."
The FDIC proposed the guidelines after the agency had to turn to nonbank investors in its two costliest resolutions — IndyMac Bank and BankUnited. It will likely need private-equity investors again if other regional-size institutions with serious problems fail.
But the guidelines — intended to clarify which investors may bid on failed banks and thrifts — drew quick opposition.
Oliver Ireland, a partner at Morrison & Foerster, even questioned why the FDIC should impose a higher requirement on private-equity firms.
"They're supposed to be resolving these institutions as cheaply as possible," he said. "If you've got somebody there who is willing to put money into it, and take it off your hands, but you're going to turn them away because they're a silo fund, or because they've got 14% Tier 1 equity instead of 15%? It raises difficult policy issues."
In addition to the capital minimum and the cross-guarantees, critics cited overly rigid restrictions on investor-owned banks extending credit to affiliates, which some observers said exceed the affiliate-transaction rules for traditional banks.
Private-equity investors would also be subject to a three-year hold period, during which they could not sell the institution.
"Did they go overboard? Yes," said Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker LLP. "It should have been more of a discussion or questions. 'We're concerned that these are new entrants to the banking industry, so what is the appropriate capital level?' The way they did it really chilled the market. … Now there is a fear that" private equity "is going to be at a competitive disadvantage."
Tom Vartanian, a partner at Fried Frank Harris Shriver & Jacobson LLP, said the proposal is unnecessary. Current law already lays out who may own a bank, and in most cases a primary regulator other than the FDIC decides whether a firm may obtain a charter to buy an institution.
"If the question is: Is there room for the agency to come back from the proposal they've made, I would ask the question another way, and that is: Why is it that the current rules that are out there that Congress has articulated and have been in place for 40 years aren't good enough?" Vartanian said.
At the proposal's release last week, FDIC Chairman Sheila Bair acknowledged the capital ratio would be unpopular.
"I know that this will be a contentious area, and we are opening high, with a proposed 15% requirement," she said.
She conceded the agency may need to recalibrate.
"I want to get it right; I'm not sure we have it right here, but I do think we have a good solid document at least to precipitate public comments," Bair said.
Other agency leaders on the FDIC board also voiced criticism.
At last week's meeting, Comptroller of the Currency John Dugan said he was concerned "the pendulum" had swung "too far" toward restricting bidders.
John Bowman, the acting director of the Office of Thrift Supervision, agreed, saying he feared the plan could "choke off … capital" and increase costs to the Deposit Insurance Fund. Still, all five of the agency's board members voted to issue the proposal for public comment.
An FDIC spokesman said outside input will be considered. "We intend to solicit feedback from stakeholders and take this into account as we craft a final rule," he said.
