I don’t find myself saying this often — Congratulations, Sheila Bair! The new rules that the FDIC proposes for private equity buyers of banks have some teeth.

I’ve been blogging overtime on this issue and would prefer to see PE out of the picture entirely but, failing that, I had hoped the FDIC would come up with some guidelines that addressed the problems with this issue. Here from the WSJ is what they proposed today:

The Federal Deposit Insurance Corp.’s board of directors on Thursday voted to seek comment on a proposal that would set new limits on allowing private equity firms to purchase failed banks. 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.

Beyond the capital requirements, the proposal would prevent certain types of investment structures from purchasing a failed FDIC-insured institution. Specifically, agency staff said it would not be appropriate to allow firms “involving complex and functionally opaque ownership structures” to buy a failed bank. Bair said the FDIC has already received bids from some firms whose legal structures raised red flags, which is one of the reasons they want to put the new rules in place.

Additionally, private equity firms would not be able to sell or transfer their interest in a purchased bank within three years without consent from the FDIC. The staff proposal said this limit would “ensure that investors are committed to providing banking services to the community … and provide a continued link” between ownership and the FDIC.

The only reaction I’ve seen so far came from Wilbur Ross who said, “It may be well intentioned but I think it could guarantee that there will be no more private equity coming into banks.” Ross was part of a consortium which bought Bank United from the FDIC a couple of months ago. I take it from his reaction that the proposals would put a crimp in the methods that PE would prefer to employ with their bank acquisitions.

I thought that the statement that Ms. Bair issued with respect to the issue spoke volumes. Here is one part that I found most interesting and reflects some of the same concerns that I have:

I am also troubled by the opacity of some of the ownership structures that we have seen in our bidding process, though these have not been winning bids. We have seen bids where it has been difficult to determine actual ownership. We have seen bidders who have wanted permission to immediately flip ownership interests. We have seen structures organized in the secrecy law jurisdictions. So based on the experiences we have gathered, I think it is prudent to put some generic policies in place which tell non-traditional investors that we welcome their participation, but only if we have essential safeguards to assure that they will approach banking in a way that is transparent, long term, and prudently managed.

This isn’t the end of the battle. It’s likely that that PE will lobby diligently to get a better deal and given their friends in the White House and Treasury they will get a hearing and maybe a sympathetic ear. The Fed, however, is pretty much on record as being uncomfortable with PE getting its nose under the banking tent, so there’s a good chance that these regulations might prevail.

more: here and here and here and here (Previous Posts On The Subject)