FDIC eases rules on buy-outs of failed banks

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Private equity firms are to be tapped to recapitalise the battered US banking system, as the nation's deposit insurance scheme runs short of funds.

In a string of concessions aimed at luring buy-out firms to acquire failed banks, the Federal Deposit Insurance Corp (FDIC) eased the rules on how much capital these banks and their new owners must set aside to protect against a second failure.

So far this year, 81 banks have collapsed under the weight of sub-prime mortgages and corporate loans gone bad, and disastrous investments in mortgage securities. Twenty-seven banks failed in the whole of 2008, and just three in 2007. Typically, the FDIC organises the sale of as much of the bank as possible, and absorbs any losses. With more than 300 banks on the regulator's "watchlist" of poorly capitalised banks, analysts believe the FDIC's coffers could run dry by the end of the year, the first time this has happened since the savings and loan crisis of the early Nineties.

"The FDIC recognises the need for additional capital in the banking system," Sheila Bair, chairman, told a meeting of the FDIC board yesterday. The concessions to private equity, she said, strikes a "good and balanced" deal that allows banks to be operated "profitably but prudently".

A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 per cent, from the 15 per cent previously proposed.