U.S. regulators have been negotiating until the last minute on highly anticipated guidelines for private equity investments in distressed banks.
The Federal Deposit Insurance Corp is meeting later on Wednesday and is expected to soften the private equity guidelines first proposed in July, in an attempt to attract more investors to the assets of distressed banks.
We're still in the process of discussions on what that document will look like, John Bowman, acting director of the Office of Thrift Supervision, told reporters during a briefing Wednesday morning on thrift industry earnings.
Bowman serves on the board of the FDIC, along with Comptroller of the Currency John Dugan, FDIC Chairman Sheila Bair, and two other FDIC officials. The meeting is scheduled to begin at 3:30 p.m. EDT (1930 GMT).
Bowman said he would withhold his opinion until he sees what the staff of the FDIC proposes. It is uncommon, but not unprecedented, for regulators to be finalizing major proposals so close to the start of a meeting.
When the strict guidelines were first proposed in July, Bowman and Dugan expressed concern that they would scare away potential investors and cut off a needed source of capital for the banking industry.
Bair defended the proposals, saying strong capital requirements and other provisions should be imposed to ensure the safety and soundness of the banks.
But she also said she was open to industry input on whether the guidelines would scare away potential investors, and said modified rules could be considered.
Private equity groups have criticized the proposals, telling the FDIC in comment letters that the rules would put an onerous burden on them.
The biggest complaint has been that the proposed rules called for a Tier 1 leverage ratio -- the ratio of a bank's capital to its assets -- of 15 percent for three years, above the 5 percent required of well-capitalized banks.
Another guideline causing concern among the private equity industry says investors would be expected to serve as a source of strength for the bank they buy, which could put them on the hook for more capital if the institution struggles.
Dugan said on Wednesday that regulators will probably back down from the tough guidelines.
The proposed rule went too far, was too stringent, Dugan said during an interview with CNBC television. The new rule, I think, will move in the other direction.
U.S. bank regulators are increasingly looking to nontraditional investors -- such as private equity groups and international banks -- to nurse failed banks back to health as the number of insolvent institutions continues to rise, draining the FDIC's deposit insurance fund.
Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.
The FDIC may roll back the 15-percent capital requirement to 10 percent, two sources familiar with the process said. One of the sources said there were some questions about whether the level would be a fixed number, or a range of perhaps 8 percent to 10 percent.
The sources declined to be identified because the rules are not public.
The FDIC may pull back from its proposed source of strength requirement by simply requiring that the holding company be able to raise capital, so that it does not necessarily have to come from the investors themselves, the first source said.
A cross-guaranty proposal -- meaning if a company owns more than one bank the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered -- could also be modified, both sources said.
A guideline, which calls for a minimum holding period of three years for the investments, is less likely to change, both sources said.