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Us Bank Buyouts May Be Regulated To 15% Tier 1 Capital

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US bank buy-outs get tougher

By Joanna Chung and Francesco Guerrera in New York

Published: July 2 2009 20:52 | Last updated: July 3 2009 01:37

Private equity that want to buy troubled banks would have to maintain significant capital levels and promise not to “flip’’ investments for at least three years under proposals by US regulators seeking to attract money into the ailing industry.

The proposed rules, which would require private equity companies to maintain a tier one capital ratio of at least 15 per cent – three times what is typically required of other banks – for at least three years, were introduced on Thursday in spite of disagreements among regulators over whether the requirements were too strict.

First reported by the Financial Times, the proposed rules to facilitate private equity acquisitions of failing banks come amid a growing effort by regulators to unlock tens of billions of dollars that could be deployed to recapitalise ailing lenders. Authorities have traditionally preferred selling troubled financial groups to other banks because of concerns over conflicts of interest created by buy-out funds’ ownership of banks.

But buy-out executives say private equity companies are among the few remaining sources of capital for troubled lenders.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, acknowledged that the requirement to hold tier one capital such as shares and liquid securities equal to 15 per cent of a bank’s total assets, was “high’’. “Obviously, we want to maximise investor interest in failed bank resolutions. On the other hand, we don’t want to see these institutions coming back,’’ she said.

John Dugan, the Comptroller of the Currency, expressed concern that the proposal contained standards that “go too far’’. Some regulators suggested some elements might have to be scaled back. The private equity industry is likely to press for change to some of the proposed rules. Thursday’s guidance “would deter future private investments’’ in banks that need fresh capital, said Douglas Lowenstein, president of the Private Equity Council.

In addition to the strong capital requirements, the proposals would require private equity groups to make extensive disclosures to the FDIC about their ownership structure and “all entities in the ownership chain’’. Ms Bair said she was “troubled’’ by the opacity of some of the ownership structures, which have made it difficult to determine ownership.

Does anyone have 15% of the net liabilities of the world's banks?

Given that the federal deficits are around $2 trillion this year AND next and that bank tier 1 capital, estimated at $1.5 trillion, is dwarfed by Roubini's estimated losses of $3.6 trillion in the banking sector alone, who's going to find the remaining $2 trillion + to restore the banks to solvency and then another $2 trillion or more to give them a 15% capital ratio.

Anyone know which assets haven't depreciated and could be sold by private equity to find a cool $2-4 trillion?

Edited by AvidFan

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Looks like a good way to f*ck over the competition prior to them being taken out by the chosen few a few years down the line.

I wonder whose big idea this was? (Rhetorical obviously).

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