FDIC's tough terms for buyers of failed banks

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WASHINGTON (Reuters) -- Private equity groups would have to meet strong capital requirements and pledge to maintain long-term investments before being allowed to buy failed banks, under controversial guidelines proposed by the Federal Deposit Insurance Corp Thursday.

The bank regulators who serve on the board of the FDIC openly clashed about the proposals, with some officials arguing the guidelines go too far and could scare away needed capital for troubled banks.

The heads of the Office of the Comptroller of the Currency and the Office of Thrift Supervision both voted for the proposals, but said they need to be clarified and may need to be scaled back before final approval.

"I do fear that the current articulation of the proposal has standards that go too far," said Comptroller of the Currency John Dugan. "There is real money and real capital that can provide savings to the deposit insurance fund."

Bank regulators are increasingly looking to nontraditional investors to nurse failed banks back to health as the number of failed institutions continue to rise, draining the FDIC's deposit insurance fund.

The proposals floated Thursday call for private equity groups to maintain strong capital at the banks they invest in, specifically a Tier 1 leverage ratio of 15%, for three years. They would also generally have to maintain the investment in a bank for three years.

Further, the requirements call for private equity groups to provide a "contractual cross guarantee," meaning that, if one firm owns two banks, the healthier institution could provide support to the weaker.

The proposed guidelines would limit private equity groups from using the acquired bank to extend credit to their investment funds, affiliates or portfolio companies.

They also would require the private equity groups to make extensive disclosures, specifically about their ownership structure, so regulators could determine who is behind an investment in a failed bank.

FDIC Chairman Sheila Bair defended the strict proposals, saying they need to include strong capital requirements and other provisions to ensure the safety and soundness of the banks.

But she said she is open to comments on the proposal and that the FDIC intends to hold a roundtable discussion next week on the topic.

"I'm not sure we have it right here, but we do have a solid document," Bair said.

Bair has said she is comfortable with the private equity deals the agency has struck so far for failed banks such as IndyMac (IDMCQ) and BankUnited (BKUNQ), but said there needed to be a more structured process.