Rules for private-equity firms eyeing failed banks get vote next week

Will the U.S. retreat from new rules that would make it harder for private-equity firms and hedge funds to buy failed banks? From Kohlberg Kravis & Roberts and Blackstone to Wilbur Ross and John Paulson, private investors have been pushing back against the changes, saying they're too onerous. If they become the law of the land, it'll become harder to find buyers for banks gone bust, they say.

Whether their complaints were effective will become clear next week, when the Federal Deposit Insurance Corp. plans to vote on the rules, it said today.
The FDIC wants stricter standards for banks owned by loosely regulated private-equity firms and hedge funds. The new owners would have to hold onto the banks for three years and adhere to higher capital ratios than other banks as protection against potential losses.

If the changes are relaxed, as private investors are hoping they will be, it would likely open the door to another group of potential bidders for failed banks. That would be a boon to the FDIC, because 77 banks have been closed this year, and plenty more are on the brink. It's usually cheaper to bring in a buyer for a failed bank than to shut it down.

That's important because the FDIC's deposit insurance fund, from which it covers the cost of closing failed banks, has been badly depleted. And some investors say they'll walk away if the rules aren't softened. (Ross has said he would "never again" bid on a failed bank under the proposed changes.)

Still, supporters of the changes worry that the risks taken by private-equity investors in pursuit of returns could endanger the banks they buy if left unchecked.

"Many of the firms interested in running these banks have shown a special appetite for risk," wrote Anna Burger, an executive of the Service Employees International Union, in a letter to the FDIC (PDF). "They have leveraged and sometimes drained the value out of their portfolio companies and left them in precarious financial situations."

How those concerns balance out for the FDIC will become clearer after next week's vote.

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