The FDIC has proposed stricter requirements on private equity investors who want to buy failing banks. The Wall Street Journal reports:

The staff proposal calls for investors to maintain certain capital levels at the acquired bank -- a minimum 15% Tier 1 leverage ratio for at least three years -- and would put other restrictions on ownership changes and where credit can be extended.


I can see why the FDIC wants banks to be well capitalized -- that's obvious. But I worry that this proposal could make things worse.It's no secret the FDIC likes to be in control. I have heard and read numerous stories of its power struggles with the Treasury over the past year or so. It has made clear its desire to increase its the power and reach. I worry that part of the motivation here was a power grab, so to make sure it was resolving the banks, rather than allow as many private equity investors to take control instead.

Here's what FDIC Chairman Sheila Bair says, from the WSJ:

"We want to maximize investor interest in failed banks," FDIC Chairman Sheila Bair said. "On the other hand we don't want these institutions coming back" and failing again.


My only response is, "Why not?" What's the harm in trying to let the private sector take care of the problem instead of relying on a government agency who is already overwhelmed? If there's an investor out there willing to take on the risk involved with rehabilitating a failing institution, shouldn't it have the opportunity to do so?

Private equity firms specialize in doing exactly this. However, if they do not have enough capital initially to meet the new requirements, they should still be allowed to give it a shot. Their business plan would certainly involve ramping up that capital over time: ultimately, for the bank to have been a good investment it will have to be well capitalized eventually.

So what happens if the private equity firm tries and fails? The bank gets resolved by the FDIC. That's just what would have happened anyway, so what's so bad about that? The FDIC should not restrain the private sector from trying to bring these banks back to life first. After all, that outcome is a lot better than liquidation through the FDIC.

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