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Us Relaxes Rules For Private Buys Of Failed Banks

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Spanish banks are expected to join private equity firms in snapping up failed US banks after the Federal Deposit Insurance Corporation (FDIC) eased its rules on buying out bust financial institutions.

The FDIC cut the amount of capital that private equity-owned banks would need to hold from 15 per cent of assets to 10 per cent.

Non-private equity-owned banks must hold capital equivalent to 5 per cent of assets.

The corporation also reduced the circumstances under which private equity firms themselves would be required to hold minimum levels of capital in case the cash should be needed to prop up their bank.

The softer guidelines were announced after a tense meeting of the FDIC board yesterday.

The board had been split when the original rules were proposed in July, with some members concerned that the capital requirements would deter potential buyers.

Yesterday one member, John Bowman, continued to argue that even the watered-down proposals may chase away investors.

The FDIC, which uses money collected from the banking industry to manage bank collapses and insure consumers’ deposits, hopes to encourage private equity firms to buy bust banks after a flurry of collapses drained its funds.

This year 81 banks have failed, compared with 25 last year and three in 2007.

Sheila Bair, the chairwoman of the FDIC, said that the corporation "recognises the need for new capital in the banking system".

Experts predicted that the new rules would speed up consolidation of US banks, with foreign banks also likely jump into the market.

Terry Moore, managing director of Accenture’s North American banking group, said: "There will be considerably more activity from some Canadian banks, Japanese institutions, Brazilians and Spanish banks.

"There are stronger banks out there that see opportunities in the US and will use this as a chance to make strategic acquisitions to bolster their presence here."

Last Friday the FDIC sold Guaranty Bank in Texas to Banco Bilbao Vizcaya Argentaria (BBVA), Spain’s second-biggest bank.

With the acquisition, BBVA more than tripled its US branch network.

With assets of $13 billion and deposits of $12 billion, Guaranty's collapse will cost the FDIC about $3 billion because the FDIC agreed to share with BBVA the risk that Guaranty’s assets could deteriorate further.

Accenture estimates that consolidation will shrink America’s banking sector by 25 per cent by 2012, raising the prospect of a stream of similar sales.

The FDIC is due to reveal on Thursday how badly its fund, worth $13 billion at the end of March, was hit by collapses in the second quarter.

Won't this allow banks to become even more stretched if there is no recovery.

Not that there will be another dip of course because everything is great.

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