FDIC's Proposed Capital Requirements for Private Equity: Still a Dumb Idea

by: Matt Stichnoth

Let’s just say the logic behind Sheila Bair’s insistence that banks controlled by private equity firms maintain higher capital ratios than other banks is not immediately obvious:

The [proposed capital levels] are less stringent than initially proposed, and FDIC Chairman Sheila C. Bair told BusinessWeek they are justified. The agency, she noted, has received several dubious bids for failed banks. One private equity firm proposed to flip the bank to another investor quickly. Another wanted an offshore company to own the bank, making it less transparent. Private equity firms "have greater risks to us than established banks," Bair said. "We want them in, but we want to set some ground rules that will address the heightened risk." [Emph. added]

So if the bank the PE firm wanted to flip kept a 10% Tier 1 ratio, Bair’s FDIC would have let the transaction happen? I don’t think so. Ditto the proposed offshore ownership plan.

So I fail to see how higher required capital levels will help address the risks Bair envisions. All they will do is discourage new private capital that the banking industry needs.

Re-think needed. . .