Proposed Statement of Policy on Qualifications for Failed Bank Acquisitions, 32931-32934 [E9-16077]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 74, Number 130 (Thursday, July 9, 2009)]
[Notices]
[Pages 32931-32934]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-16077]


-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

RIN 3064-AD47


Proposed Statement of Policy on Qualifications for Failed Bank 
Acquisitions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed statement of policy with request for comment.

-----------------------------------------------------------------------

SUMMARY: The FDIC is proposing to issue a Statement of Policy on 
Qualifications for Failed Bank Acquisitions (Proposed Policy Statement) 
to provide guidance to private capital investors interested in 
acquiring or investing in failed insured depository institutions 
regarding the terms and conditions for such investments or 
acquisitions. This Proposed Policy Statement is being published with a 
request for comment in order to obtain the public's views on the 
provisions of the policy statement before it becomes effective.

DATES: Comments must be received by the FDIC no later than August 10, 
2009.

ADDRESSES: You may submit comments on the Proposed Policy Statement by 
any of the following methods:
     Agency Web Site: https://www.FDIC.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on 
the agency Web site.
     E-mail: Comments@FDIC.gov. Include RIN  3064-AD47 
on the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7 a.m. and 5 p.m.
    Instructions: All comments received will be posted generally 
without change to https://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Catherine Topping, Counsel, Legal 
Division, (202) 898-3975 or ctopping@fdic.gov, Charles A. Fulton, 
Counsel, Legal Division, (703) 562-2424 or chfulton@fdic.gov, or Mindy 
West, Chief, Policy and Program Development, Division of Supervision 
and Consumer Protection, (202) 898-7221 or miwest@fdic.gov.

SUPPLEMENTARY INFORMATION

I. Background

    Recently, private capital investors have indicated interest in 
purchasing insured depository institutions in receivership.\1\ The FDIC 
is particularly concerned that owners of banks and thrifts, whether 
they are individuals, partnerships, limited liability companies, or 
corporations, have the experience, competence, and willingness to run 
the bank in a prudent manner, and accept the responsibility to support 
their banks when they face difficulties and protect them from insider 
transactions.
---------------------------------------------------------------------------

    \1\ The purchase or acquisition of a failed depository 
institution in receivership refers to the purchase of the deposit 
liabilities, or both such liabilities and assets.
---------------------------------------------------------------------------

    Especially in light of the increased number of bank and thrift 
failures, and the consequent increase in interest by potential 
acquirers, the FDIC has evaluated the policies that apply in deciding 
whether a prospective acquisition is appropriate. The FDIC has reviewed 
various elements of private capital investment structures and considers 
that some of these investment structures raise potential safety and 
soundness considerations and risks to the Deposit Insurance Fund (DIF) 
as well as important issues with respect to their compliance with the 
requirements applied by the FDIC in its decision on the granting of 
deposit insurance. The concerns center on the need for fully adequate 
capital, a source of financial and managerial strength for the 
depository institution, and the potential adverse effects of extensions 
of credit to affiliates. These structuring issues are present with 
respect to any new proposed acquisition of a failed insured depository 
institution.
    The FDIC is seeking public input on this Proposed Policy Statement. 
This guidance describes the terms and conditions that private capital 
investors would be expected to satisfy to obtain eligibility for a 
proposed acquisition structure. These measures would cover capital 
support and cross guarantees; transactions with affiliates; secrecy 
jurisdiction investors; continuity of ownership requirements, and 
disclosure.

II. Request for Public Comment

    The FDIC invites comments on all aspects of the Proposed Policy 
Statement, including the following questions:
    1. The measures contained in the Proposed Policy Statement will not 
be applied to individuals, partnerships, limited liability companies, 
or corporations, that accept the

[[Page 32932]]

responsibilities under existing law to serve as responsible custodians 
of the public interest that is inherent in insured depository 
institutions, but will be applied to (a) private capital investors in 
certain companies, proposing to assume deposit liabilities, or both 
such liabilities and assets, from a failed insured depository 
institution in receivership (including all entities in such an 
ownership chain) and to (b) applicants for insurance in the case of de 
novo charters issued in connection with the resolution of failed 
insured depository institutions (hereinafter ``Investors''). Is some 
other definition more appropriate?
    2. The Proposed Policy Statement indicates that so-called ``silo'' 
structures would not be considered to be eligible bidders for failed 
bank assets and liabilities since under these structures beneficial 
ownership cannot be ascertained, the responsible parties for making 
decisions are not clearly identified, and/or ownership and control are 
separated. Are there any reasons why they should be considered to be 
eligible bidders?
    3. One of the most important elements in the Proposed Policy 
Statement is the requirement that the acquired depository institution 
be very well capitalized. The text requires a Tier 1 leverage ratio of 
15 percent, that this ratio be maintained for a period of at least 3 
years, and thereafter that the capital of the insured depository 
institution remain at a ``well capitalized'' level. The capital 
adequacy of depository institutions formed from assets and/or 
liabilities acquired from failed banks in receivership is a matter of 
crucial importance for reasons of safety and soundness and for 
protection of the Deposit Insurance Fund. This is especially important 
in the case of newly established banks that, as a general matter, have 
a weak record of performance in the early years of activity.
    In view of these considerations it has been suggested that a Tier 1 
leverage ratio of 15 percent included in the text of the Proposed 
Policy Statement is entirely necessary and appropriate for at least 
some minimum period after the new depository institution acquisition. 
On the other hand, it has also been suggested that safety and soundness 
considerations can be satisfied with a lower, but a still high level, 
of Tier 1 capital more in line with the level normally applicable to 
bank or thrift investors subject to prudential regulation, activities 
restrictions and that serve as a source of strength for their 
subsidiary institutions. It is also suggested that exceeding such 
normal capital levels could have the effect of making investments in 
the assets and liabilities of failed banks and thrifts uncompetitive 
and uneconomic.
    The FDIC seeks to accomplish both objectives in setting initial 
capital requirements for failed bank asset and liability acquisitions 
under this Proposed Policy Statement. Clearly, a high level, above 
normal levels, is necessary to deal with the unusual circumstances 
facing banking institutions, especially new banking institutions, 
today. The FDIC seeks the views of commenters on the appropriate level 
of initial capital that will satisfy safety and soundness concerns 
without making investments in the assets and liabilities of failed 
banks and thrifts uncompetitive and uneconomic.
    As noted above, the text of the Proposed Policy Statement requires 
an initial Tier 1 leverage ratio of 15 percent, that this ratio be 
maintained for a period of at least 3 years, and thereafter that the 
capital of the insured depository institution remain at a ``well 
capitalized'' level. Should there be a further requirement that if 
capital declines below the required capital level, the institution 
would be treated as ``undercapitalized'' for purposes of Prompt 
Corrective Action and the institution's regulator would have available 
all the measures that would be available in such a situation?
    4. Should the Source of Strength commitment included in the 
Proposed Policy Statement be retained in the final policy statement? 
Should the commitment be enhanced to require from the shell holding 
company and/or the Investors a broader obligation than only a 
commitment to raise additional equity or engage in capital qualifying 
borrowing?
    5. Should the Cross Guarantee commitment included in the Proposed 
Policy Statement be retained in the final policy statement? Should the 
commitment contained in the Proposed Policy Statement be enhanced by 
requiring a direct obligation of the Investors?
    6. The Proposed Policy Statement limits the use of entities in an 
ownership structure that are domiciled in bank secrecy jurisdictions 
unless the investors are subsidiaries of companies that are subject to 
comprehensive consolidated supervision as recognized by the Federal 
Reserve Board. Should entities established in bank secrecy 
jurisdictions be considered to be eligible bidders even without being 
subject to comprehensive consolidated supervision?
    7. Under the Proposed Policy Statement, Investors would be 
prohibited from selling or otherwise transferring securities of the 
Investors' holding company or depository institution for a 3 year 
period of time following the acquisition absent the FDIC's prior 
approval. Is 3 years the correct period of time for limiting sales, or 
should the period be shorter or longer?
    8. The Proposed Policy Statement provides that Investors that 
directly or indirectly hold 10 percent or more of the equity of a bank 
or thrift in receivership would not be considered eligible to be a 
bidder to become an investor in the deposit liabilities, or both such 
liabilities and assets, of that failed depository institution. Is this 
exclusion from bidding eligibility appropriate on the basis of the need 
to assure fairness among all bidders and to avoid an incentive for the 
10 percent or more Investor to seek to take advantage of the potential 
availability of loss sharing by the FDIC if the subsidiary bank or 
thrift enters into a receivership?
    9. Should the limitations in this Proposed Policy Statement be 
lifted after a certain number of years of successful operation of a 
bank or thrift holding company? If so, what would be the appropriate 
timeframe for lifting the conditions? What other criteria should apply? 
Should all or only some of the conditions be lifted?

III. Text of Proposed Policy Statement

    The text of the Proposed Statement of Policy on Qualifications for 
Failed Bank Acquisitions follows:

Proposed Statement of Policy on Qualifications for Failed Bank 
Acquisitions

Introduction
    Capital investments by individuals and limited liability companies 
acting through holding companies operating within a well developed 
prudential framework has long been the dominant form of ownership of 
insured depository institutions. From the perspective of the FDIC's 
interest as insurer and supervisor of insured depository institutions, 
this framework has included, in particular, measures aimed at 
maintaining well capitalized bank and thrift institutions, support for 
these banks when they face difficulties, and protections against 
insider transactions. The ability of the owners to provide financial 
support to depository institutions with adequate capital and management 
expertise are essential safeguards. These safeguards are particularly 
appropriate for owners of insured depository institutions given the 
important benefits conferred on

[[Page 32933]]

depository institutions by deposit insurance.
    Recently, private capital investors have indicated an interest in 
participating in acquiring the deposit liabilities, or both such 
liabilities and assets, of failed insured banks and thrifts in 
receivership in the current circumstances in which substantial 
additional capital is needed in the U.S. banking system. The FDIC is 
keenly aware of this need, particularly as it arises in the context of 
its function as the receiver of failed insured depository institutions 
charged with protecting insured deposits based on a congressionally 
mandated least cost to the insurance fund solutions for these 
institutions. The FDIC is also aware that new banks, regardless of 
their investor composition, pose an elevated risk to the deposit 
insurance fund since they generally lack a core base of business, a 
proven track record in the banking industry, and are vulnerable to 
significant losses in the early years of incorporation.
    The FDIC is of the view that private capital participation in the 
acquisition of the deposit liabilities, or both such liabilities and 
assets, from a failed depository institution in receivership should be 
consistent with the foregoing basic elements of insured depository 
institution ownership. The FDIC has reviewed various elements of 
private capital investment structures for consistency with these 
principles. Some acquisition arrangements, such as those involving 
complex and functionally opaque ownership structures, typified by so-
called ``silo'' organizational arrangements, in which the beneficial 
ownership cannot be ascertained, the responsible parties for making 
decisions are not clearly identified, and/or ownership and control are 
separated, would be so substantially inconsistent with these principles 
as not to be considered as appropriate for approval for ownership of 
insured depository institutions. While these structuring issues are 
generally attributed to private equity ownership investments, the FDIC 
will apply the same standard of review to any prospective proposed 
acquisition of a failed bank or thrift to ensure parity and to avoid 
the creation of loopholes or regulatory arbitrage.
    Other ownership structures raise important policy issues that can 
be addressed so as to meet the principles applied by the FDIC in its 
decisions on the granting of deposit insurance. The FDIC is 
particularly concerned that owners of banks and thrifts, whether they 
are individuals, partnerships, limited liability companies, or 
corporations, accept the responsibility to serve as responsible 
custodians of the public interest that is inherent in insured 
depository institutions and will devote their efforts to assuring that 
banks or thrifts acquired with assistance from the deposit insurance 
fund do not return to the category of troubled institutions.
    In order to address the concerns raised mainly by ownership 
structures involving more than de minimis investments that typically 
involve a shell holding company owned by another entity or other 
entities that avoid certain of the responsibilities of bank and thrift 
ownership, the FDIC is establishing standards for bidder eligibility 
that would be applicable to (a) private capital investors in a company 
(other than a bank or thrift holding company that has come into 
existence or has been acquired by an Investor at least 3 years prior to 
the date of this policy statement), that is proposing to directly or 
indirectly assume deposit liabilities, or such liabilities and assets, 
from a failed insured depository institution in receivership, and to 
(b) applicants for insurance in the case of de novo charters issued in 
connection with the resolution of failed insured depository 
institutions (hereinafter ``Investors'').
    The standards provide for:
    (a) Capital support of the acquired depository institution;
    (b) agreement to a cross guarantee over substantially commonly 
owned depository institutions;
    (c) limits on transactions with affiliates;
    (d) maintenance of continuity of ownership as specified below; and
    (e) avoidance of secrecy law jurisdiction vehicles as the channel 
for their investments unless the parent company is subject to 
consolidated home country supervision.
    It is the intention of the FDIC to apply these requirements as set 
out below.
    Capital Commitment: Investors would be expected to agree to cause 
the depository institution acquiring deposit liabilities, or both such 
liabilities and assets, from a failed depository institution in 
receivership to be initially capitalized at a minimum 15 percent Tier 1 
leverage ratio for a period of 3 years unless the period is extended by 
the FDIC, and thereafter to maintain the depository institution at no 
lower level of capital adequacy than ``well capitalized'' during the 
remaining period of their ownership. If at any time the depository 
institution fails to meet this standard, the Investors would have to 
immediately facilitate restoring the institution to the ``well 
capitalized'' standards. Failure to maintain the required capital level 
will result in the institution being treated as ``undercapitalized'' 
for purposes of Prompt Corrective Action triggering all of the measures 
that would be available to the institution's regulator in such a 
situation.
    Source of Strength: Investors organizational structures subject to 
the measures provided for in this policy statement would be expected to 
agree to serve as a source of strength for their subsidiary depository 
institutions. Source of strength commitments under this paragraph are 
to be supported by the agreement of the depository institution holding 
company in which the Investors have invested that holds the stock of 
such depository institutions to sell equity or engage in capital 
qualifying borrowing.
    Cross Guarantees: Investors whose investments, individually or 
collectively, constitute a majority of the direct or indirect 
investments in more than one insured depository institution would be 
expected to pledge to the FDIC their proportionate interests in each 
such institution to pay for any losses to the deposit insurance fund 
resulting from the failure of, or assistance provided to, any other 
such institution.
    Transactions with Affiliates: All extensions of credit to 
Investors, their investment funds if any, any affiliates of either, and 
any portfolio companies (i.e., companies in which the Investors or 
affiliates invest) by an insured depository institution acquired or 
controlled by such Investors under this policy statement would be 
prohibited. For purposes of this policy statement the term ``extension 
of credit'' is defined in 12 CFR 223.3(o) including any subsequent 
amendments, and the term ``affiliate'' is any company in which an 
investor owns 10 percent or more of the equity of that company.
    Secrecy Law Jurisdictions: Investors employing ownership structures 
utilizing entities that are domiciled in bank secrecy jurisdictions 
would not be eligible to own a direct or indirect interest in an 
insured depository institution unless the Investors are subsidiaries of 
companies that are subject to comprehensive consolidated supervision 
(``CCS'') as recognized by the Federal Reserve Board, and they execute 
agreements on the provision of information to the primary Federal 
regulator about the non-domestic Investors' operations and activities; 
maintain its business books and records (or a duplicate) in the U.S.; 
consent to the disclosure of information that might be covered by 
confidentiality or privacy laws and to cooperate with the FDIC, if 
necessary, in obtaining information

[[Page 32934]]

maintained by foreign government entities; consent to jurisdiction and 
designation of an agent for service of process; and consent to be bound 
by the statutes and regulations administered by the appropriate U.S. 
Federal banking agencies.
    Continuity of Ownership: Investors subject to this policy statement 
would be prohibited from selling or otherwise transferring securities 
of the Investors' holding company or depository institution for a 3 
year period of time following the acquisition absent the FDIC's prior 
approval. This time period is consistent with the current de novo 
business plan change approval and other requirements in FDIC Deposit 
Insurance Orders. The FDIC does not expect to approve any sale to a 
private capital investor during such 3 year period unless the buyer 
agrees to be subject to the same conditions that are applicable under 
this policy statement to the selling Investor.
    Special Owner Bid Limitation: Investors that directly or indirectly 
hold 10 percent or more of the equity of a bank or thrift in 
receivership would not be considered eligible to be a bidder to become 
an investor in the deposit liabilities, or both such liabilities and 
assets, of that failed depository institution.
    Disclosure: Investors subject to this policy statement would be 
expected to submit to the FDIC information about the Investors and all 
entities in the ownership chain including such information as the size 
of the capital fund or funds, its diversification, the return profile, 
the marketing documents, the management team and the business model. In 
addition, Investors and all entities in the ownership chain will be 
required to provide to the FDIC such other information as is determined 
to be necessary to assure compliance with this policy statement.
    Limitations: Nothing in this policy statement is intended to 
replace or substitute for any determination required by a relevant 
depository institution's primary Federal regulator or a Federal bank or 
thrift holding company regulator under any applicable regulation or 
statute, including, in particular, bank or thrift holding company 
statutes, or with respect to determinations made and requirements that 
may be imposed in connection with the general character, fitness and 
expertise of the management being proposed by the Investors, the need 
for a thorough and reasonable business plan that addresses business 
lines and strategic initiatives and includes appropriate contingency 
planning elements, satisfactory corporate governance structure and 
representation, and any other supervisory matter.

    By order of the Board of Directors.

    Dated at Washington, DC, this 2nd day of July, 2009.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E9-16077 Filed 7-8-09; 8:45 am]
BILLING CODE 6714-01-P