VIEWPOINT: Clear Up Capital Regs, Free Up Capital Access

Article excerpt

Byline: Thomas Vartanian

Banks have formidable challenges ahead of them. To meet those challenges, a better economy will help, but so will access to new sources of capital.

The skyrocketing number of formal and informal enforcement actions brought by federal banking regulators, and the Treasury Department's principles for reforming the bank regulatory capital frameworkprovide a sobering glimpse into the quantitative and qualitative augmentations of bank capital requirements that are likely to come.

At the same time, regulatory hurdles have been erected for some capital investors. The most concrete examples of new policies with regard to private capital are the Federal Reserve Board's September 2008 statement on private-equity investments in banks and the FDIC's August 2009 statement of policy on qualifications for failed-bank acquisitions.

Some policies, however, have been developed on a transaction-by-transaction basis, leaving uniformity and clarity to suffer. The FDIC is reviewing its policy to determine whether the first six months of its life suggest the need for change to some, all or none of it.

Among the investors that have been involved in recapitalizing failed, failing or live banks in the past three years, private-equity funds and hedge funds have been singled out for special treatment.

Though that treatment may be triggered as much by the structure of a transaction as who the investors are, the FDIC has to date declined to define the private investors that are subject to its policy statement. The result is that the rules of engagement, save one, are uncertain at a very important time for the attraction of outside bank capital. The one rule that seems clear is that certain private investors must accept a regulatory "surcharge" in return for regulatory approval.

The FDIC's policy statement represents the critical tension in this complicated relationship between private capital investors and federal bank regulators. Wall Street, the capital markets, capital intermediaries and sources of capital are all changing.

Through all this change, the regulators understandably must decipher how the new capital markets of 2010 relate to bank investment laws and regulations written as many as 50 years ago.

Similarly, private-equity and hedge fund investors are trying to accommodate the rules, which, even when they are clear, are actually applied differently by each of the four federal bank regulators in some cases.

The parties have seemed to move toward each other as familiarity has grown. Some private-equity and hedge fund investors - many a crosssection of Main Street America with investors that include pension funds, unions, charities, universities and governmental entities - have moved in the direction of diluting their presence by participating in blind pools with diverse equity participants led by talented bank management teams.

When the goalposts are continually moving, however, it becomes more difficult for banks to attract this capital. Indeed, the rules have recently been informally expanded to require greater information from relatively de minimis investors, "request" that investors not expressly covered by the terms of the FDIC's statement of policy conform to it and mandate that certain foreign private-equity and hedge fund investors agree to become U. …