The Dodd-Frank rulemaking burden may have dampened
the Federal Reserve's willingness to consider creative bank
Attorneys say that over the past twelve months it's
been harder to have detailed conversations with the regulator
about proposed investments in banks and the nuances of
They suspect this is because of time constraints
caused by the regulatory overhaul law.
"I think the Federal Reserve staff, like most
regulatory staff, are so overwhelmed by the demands of
Dodd-Frank rulemaking requirements that they just don't have
the same appetite for novel structures," said Gregory Lyons, a
New York-based partner with Debevoise & Plimpton.
"They seem to be getting more strict in their views
as to what an acquisition deal needs to look like to pass
muster with them," he added.
Another contributing factor could be staff changes
including the 2010 departure of key figure Patricia Robinson,
who oversaw M&A applications.
The Reserve's new approach could be particularly
problematic for private equity funds which look to maximise
target-control while avoiding bank holding company-status.
Generally funds look to avoid being deemed a bank
holding company because it would require them to divest from
their other activities.
They stay below the 25% voting stock-threshold and
make great effort to keep board representation, officer
interlock, business relationships and other control factors to
a level that helps them direct the bank's operations, but
doesn't cause the regulator to designate it a bank holding
This becomes more difficult, however, when the
Federal Reserve is reluctant to entertain novel structures.
It's also unfortunate, as the credit markets have
stabilised enough for private equity firms to make informed
purchases. "I think private equity now feels more comfortable
that it understands and can value the balance sheet of a bank,"
An area where regulators may have to re-think this
strict approach is failed banks.
The percentage of first losses which the Federal
Deposit Insurance Corporation's (FDIC) will accept under its
loss share agreements declined last year, making failed banks
less attractive for PE investors.
For now there are strategic acquirers looking to
take on these assets, but this is expected to dry up
"They may be forced to show enhanced flexibility.
There's still a lot of problem banks out there and if the
strategic acquirers stop buying, what happens then?" said
"They have to find buyers to sure up the system
otherwise the FDIC fund that is insuring these bank deposits
takes the hit directly," noted Jay Cohen, a private equity
partner with Duane Morris.
Another factor that could be contributing to
regulators' reluctance to permit large PE investments in failed
banks is the public's - sometimes inaccurate - perception of
private equity. Failed banks are a politically sensitive topic,
given the unfinished inquiry into the cause of the financial
"The FDIC gets a little backlash on letting these
private equity funds acquire these failed banks," said