Monday, September 14, 2009

Wrong-Way OCC

"Federal regulators approved watered-down guidelines for private-equity firms seeling to snap up failed US banks, in a bid to tap a new and controversial source of capital for financial institutions. ... The five-member board of the FDIC voted 4-1 in favor it rules that would require buyout firms to hold on to failed banks they purcahse for at least three years. Investors would also be required to mantain larger amounts of high-quality capital at their acquired banks. In both cases, the rules are substantially tougher than those for regular banks competing for the same spoils. ... Acknowledging that regulators need to find new sources of capital, Comptroller of the Currency John Dugan said investors need to be deemed appropriate. ... 'Requiring us to have effectively twice as much capital as another bidder puts us at a competitive disadvantage,' says longtime bank investor Gerald Ford, a general partner at private-equity firm Flexpoint Ford. ... The proposal approved Wednesday would require private-equity firms to maintain high-quality capital--known as Tier 1 common equity--equivalent to 10% of the bank's overall assets. That is lower than the 15% Tier 1 leverage-rate proposed in July but higher than the 5% requirement for traditional banks", my emphasis, Michael Crittenden and Peter Lattman at the WSJ, 27 August 2009, link:

I agree with Ford. Dugan, you blew it. Raise the Tier 1 capital requirement for traditional banks to 10%. Or higher. See my 21 June 2009 post:

1 comment:

Anonymous said...

10% Tier 1 seems a modest amount of a capital to anchor a bank.

Since rates were passive for so long lower capital cushions seemed adequate.

The conditions which caused the crisis came from sloppiness at the Fed... too much liquidity sloshing around... Treasury, Fed, OCC they all fell down.