Bair: I Need Private Equity Firms to Buy Banks

Dan Weil

FDIC Chairman Sheila Bair is encouraging private equity firms to get involved with buying troubled banks.

“The larger banks are capital constrained right now, so they're not bidding as much as they used to,” she says in an interview with Forbes.

“So we need more capital. If (private equity) is going to do it the right way and provide adequate sources of strength and run a well-managed bank, then we don't want to preclude them from bidding.”

Plenty of private equity firms already are dipping their toes into the banking sector, including WL Ross, Carlyle Group and Blackstone.

Bair offers some guidelines for the firms.

First, she addresses the issue of de novo banks. These are new banks set up by the private equity firms to take over failed banks.

“A de novo institution in and of itself can be risky,” Bair notes.

“If you look, failures for de novo banks can be higher. So in a situation where you have a new bank owned by non-traditional bank investors acquiring a failed bank, we want to make sure we don't see the bank back in a few years.”

It’s important that the bank has adequate capital and strong management, she says. “For non-traditional bank investors like private equity, we want a lot higher capital up front.”

Bair also wants to implement rules to prevent flipping, “so (the buyout firms) don't try to flip for a quick profit.”