New FDIC rules on private equity are a big mistake, say Carlyle executives P. Olivier Sarkozy and Randal Quarles.
The bank regulator wants private equity investors buying its failed banks to hold three times as much capital as other buyers, agree to supply an unlimited amount of capital in the future if requested, and to cross-guarantee obligations of other banks they own.
“Any one of these requirements would pose a substantial deterrent to private investors,” the Carlyle executives write in The Wall Street Journal.
“Together, the three would dramatically reduce the amount of capital that the FDIC could attract to its auctions of failed banks.”
The FDIC, which is on the hook for over $100 billion over the next few years, should be working to attract private investors to cut its losses, not drive it away.
Instead of picking on private equity, the FDIC should require all purchasers of failed banks to have good management, a solid business plan, and a financial structure that controls risk.
“Private equity has proven itself capable of strengthening the banking sector to the benefit of the FDIC and, ultimately, the taxpayer,” they say.
The FDIC is trying to strike a balance between attracting capital and managing risk, according to FDIC Chairman Sheila Bair.
"How investments in insured depository institutions are structured is critical for the banking system as well as the FDIC," she said.
"We are particularly concerned with the owners' ability to support depository institutions with adequate capital and management expertise.”
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