The Federal Deposit Insurance Corp. is considering ways to make it easier for private equity firms to buy banks as a way to protect the fund from a coming wave of bank failures.
The initiative, which was reported by the New York Times, comes as regulators grow increasingly concerned that, as the government's program to bail out larger institutions winds down, smaller banks are starting to fail at an alarming rate.
So far this year, the FDIC has closed 77 banks.
When banks fail, the FDIC, which insures customer deposits up to $250,000 per account, typically attempts to find an outside bank to purchase the company's assets. When that happens, the buyer and not the FDIC becomes responsible for satisfying depositor demands.
But because many of these small banks are overloaded with debt and have relatively small customer bases, larger banks are shying away from buying them even at distressed prices, forcing the FDIC to wind up the failing bank's operations and pay off depositors.
The result is that the FDIC's insurance funds has run perilously low in the last year, the Times reported, down to $13 billion in March from $52.8 billion a year ago.
Permitting private equity firms to buy insolvent lenders is one way to solve this problem. Many such firms are champing at the bit to invest in the banking sector, which is seen as a cheap buy in the current economic climate.
The FDIC, however, requires higher capital requirements for private equity firms than for publicly traded banks. Regulators will meet next week to consider lowering that standard.
The initiative, which was reported by the New York Times, comes as regulators grow increasingly concerned that, as the government's program to bail out larger institutions winds down, smaller banks are starting to fail at an alarming rate.
So far this year, the FDIC has closed 77 banks.
When banks fail, the FDIC, which insures customer deposits up to $250,000 per account, typically attempts to find an outside bank to purchase the company's assets. When that happens, the buyer and not the FDIC becomes responsible for satisfying depositor demands.
But because many of these small banks are overloaded with debt and have relatively small customer bases, larger banks are shying away from buying them even at distressed prices, forcing the FDIC to wind up the failing bank's operations and pay off depositors.
The result is that the FDIC's insurance funds has run perilously low in the last year, the Times reported, down to $13 billion in March from $52.8 billion a year ago.
Permitting private equity firms to buy insolvent lenders is one way to solve this problem. Many such firms are champing at the bit to invest in the banking sector, which is seen as a cheap buy in the current economic climate.
The FDIC, however, requires higher capital requirements for private equity firms than for publicly traded banks. Regulators will meet next week to consider lowering that standard.
published August 21, 2009, 0 Comments
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