The FDIC's Statement Of Policy On Qualifications For Failed Bank Acquisitions

Author:Mr Julius Loeser, Steven D. Lofchie, Maurine R. Bartlett and Bryan T. Shipp
Profession:Cadwalader, Wickersham & Taft LLP

Originally published August 31, 2009

The Board Of Directors of the Federal Deposit Insurance Corporation ("FDIC") has adopted its final Statement of Policy on Qualifications for Failed Bank Acquisitions (the "Acquisition Policy Statement") by a 4-1 vote.1 As adopted, the Acquisition Policy Statement applies to investments by "private capital investors," which term appears to be the FDIC's name for private equity funds ("PEFs"), albeit the scope of application of the Acquisition Policy Statement remains unclear (as discussed in Section II of this memorandum) and will afford the regulators considerable discretion in its application.2

While the Acquisition Policy Statement is not as burdensome to PEFs as would have been the case under the Proposed Guidelines,3 as discussed in our prior Memorandum of July 15, 2009,4 it nonetheless imposes burdens on PEFs that will not apply to other investors in banks or thrifts. Accordingly, PEFs should give substantial consideration to structuring an acquisition in a manner that avoids application of the Acquisition Policy Statement. It appears to be possible to avoid application of the policy if a private capital investor partners with an established bank or thrift that has (i) a "strong majority" interest" in the acquisition transaction, and (ii) a "successful history" operating insured depository institutions (which we shall term the "Experienced Partner Exemption"). It will be desirable to consult early in acquisition planning with the FDIC and other bank regulators to determine whether the private capital investor will be able to benefit from the Experienced Partner Exemption.

  1. BACKGROUND TO THE ACQUISITION POLICY STATEMENT: COMPETING CONSIDERATIONS The Acquisition Policy Statement was adopted against a background of increasing numbers of banks failures eroding the FDIC's Deposit Insurance Fund ("DIF"). As of August 31, 84 banks have failed this year. The DIF has shrunk by 75% from its level in January 2009. In addition, the FDIC is about to collect a special assessment from banks to replenish the DIF, and is already discussing the need for a second special assessment. Thus, on the one hand, the regulators would clearly like to bring new capital into the banking industry; on the other hand, it appears that new capital will not be treated equally with old capital.

    During pre-vote consideration of the Acquisition Policy Statement, the FDIC Vice Chairman stated rather bluntly, "we need to attract bidders [for failed banks]" while FDIC Chairman Bair appeared comfortable that PEFs would be willing to bid on failed banks in light of the revisions made to the Proposed Guidelines by the Acquisition Policy Statement. The Acting Director of the Office of Thrift Supervision ("OTS"), the only Board member who voted against adoption,5 stated bluntly, prior to the vote, that the Acquisition Policy Statement essentially singled out non-bank investors as persona non-grata in the banking industry without adequate justification or inquiry.6

    Chairman Bair noted that PEF buyers lacked "a buyer's balance sheet" and suggested that their opacity could put the FDIC at significant risk, especially in light of FDIC loss-sharing arrangements with certain buyers.7 She also asserted that PEFs were notorious for a short-term mindset with respect to their investments, and that such an approach might have an adverse long-term impact on the prospects of the target institution and the banking industry generally. In any event, the general view expressed by those voting in favor of the Acquisition Policy Statement was that the FDIC had struck a proper balance among competing public interests.

  2. THE ACQUISITION POLICY STATEMENT: SCOPE AND APPLICABILITY The Acquisition Policy Statement technically applies to:

    private investors in a company, including any company acquired to facilitate bidding on failed banks or thrifts that is proposing to, directly or indirectly, (including through a shelf charter) assume deposit liabilities, or such liabilities and assets, from the resolution of a failed insured depository institution; and applicants for insurance in the case of de novo charters issued in connection with the resolution of failed insured depository institutions (hereinafter "Investors"). This covers investors in a company acquired to facilitate bidding and, of course, applies to investors in firms using a shelf charter to acquire liabilities of a failed bank or thrift. Despite comments requesting greater precision in the definition of "private capital investor," the FDIC left the definition vague, giving the agency greater scope of authority to determine the definition by interpretation. The Acquisition Policy Statement indicates that, "the requirements it imposes on investors only apply to investors that agree to its terms," which would seem to suggest that in practice the application of the Acquisition Policy Statement will be open to discussion on a case-by-case basis with potential investors. Nevertheless, the FDIC may have the view that any "private capital investor" that voluntarily bids on a failed bank or thrift after adoption of the Acquisition Policy Statement is implicitly agreeing to be bound by the terms of the policy.

    1. Club Deals While the clear intent of the Acquisition Policy Statement is to reach PEFs, its terms apply to "private capital investors," which is broad enough to cover so-called "club deals" in which no single PEF "controls" the bank or thrift.8

    2. Experienced Partner Exemption The Acquisition Policy Statement would not apply to new investors partnering with existing banks or thrifts that have a "strong majority interest" in the acquired bank or thrift and a history of successful operation. The regulatory concern embodied in the Acquisition Policy Statement is clearly with new entrants to the banking industry. Indeed, the Vice Chairman of the FDIC expressly suggested that PEFs should partner with existing banks...

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