The Dodd-Frank rulemaking burden may have dampened
the Federal Reserve’s willingness to consider
creative bank acquisition structures.
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 different structures.
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
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 company.
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," said Lyons.
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?"
"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