FDIC rewrites playbook for private equity in failed bank auctions

Private equity firms interested in bidding for failed bank assets will have greater access following actions by the Federal Deposit Insurance Corp.

In March, the FDIC rescinded a policy that sets limits on private equity firms' participation in failed bank bidding processes. Scrapping the policy, which was put in place during the wave of bank failures in 2009, removed hurdles such as steep capital requirements and a stringent ownership threshold.

The rescission, along with the FDIC's ongoing efforts to create an emergency shelf charter process, will bolster private equity involvement in failed bank bidding processes, sources told S&P Global Market Intelligence.

"It will widen the bidder pool. Whether or not [private equity] firms end up being the best bids in the scenario that a bank fails and they're bidding on it, we'll see," said Isaac Wheeler, managing director and head of balance sheet strategy at Derivative Path.

The moves also benefit the FDIC by opening the failed bank bidding process to a lucrative group of bidders that can help resolve bank failures more quickly and cheaply.

"What we have now in our society is a level of uber-rich individuals who could easily recapitalize a bank without blinking in dollar amounts that back in 2009, 2010 were completely unthinkable," said Joseph Lynyak, a partner advising banks and other financial services companies at Dorsey & Whitney LLP.

Private equity has "a lot of dry powder," so "it makes sense at least for them to really peel back those regulations to allow them to really participate in bidding on these distressed banks and stepping in," said Lowell Citron, partner advising financial institutions and chair of the debt finance practice at Lowenstein Sandler LLP.

A seat at the table

Under the 2009 policy statement, one major hurdle was the requirement that private equity buyers maintain a minimum Tier 1 capital ratio of 10% at the bank for at least three years, twice the 5% level required for a bank to be considered well capitalized.

The rescission also allows private equity buyers to sell the bank without time restrictions, removing the policy statement's ban on selling the entity within the first three years.

The FDIC called the rescinded qualifications "onerous and highly prescriptive" in its Federal Register filing.

The rescission builds on other recent actions by the agency to attract private equity bidders. In January, the FDIC facilitated participation by releasing templates for purchase and assumption agreements.

The agency is also working on establishing an emergency shelf charter process for nonbanks, FDIC Chairman Travis Hill said in March. Approval for the most recent FDIC shelf charter applicant took about 22 months, according to Hill.

The FDIC has been seeking to remove hurdles for private equity in failed bank bidding processes since the spring 2023 bank failures, which highlighted difficulties for potential buyers. Private equity firms faced challenges accessing information, but the FDIC eventually permitted them to access the data room.

"There's probably a recognition that there's some inefficiency today in the way that the FDIC runs their auctions," Wheeler said in an interview. "The more losses there can be, the more inefficiency there is, and therefore, increasing the size of the bidding pool is key to that."

Hurdles remain

While removing those qualifications will open the door more widely for private equity firms, the FDIC will still have high expectations for nonbank buyers, sources said.

The rescission should not be interpreted in a way that "none of the sort of the classical items that the FDIC will consider in connection with any group that's seeking to buy a bank would apply," Robert Tammero Jr., partner at K&L Gates LLP representing financial institutions on M&A and more, said in an interview. "It's just that they're looking to peel back the additional layers of requirement and complexity that were imposed by the statement of policy in 2009."

The FDIC will have more flexibility when reviewing bids, "but the same underlying policy issues" remain, Dorsey & Whitney's Lynyak said. "What is the capital contribution? Is there going to be any form of a guarantee? How long will they continue to be the investors without selling off the institution? Those are all concerns that will still be present."

Management expertise will remain a key factor in evaluating private equity buyers' bids.

"Prudence would dictate from the FDIC's point of view that they still would check down on these issues, but they would not be automatic nonstarters," Lynyak said.