OCC Opening a Charter Door to Nonbanks

WASHINGTON — As bank failures continue to rise, federal regulators are stepping up efforts to ease access for private-equity firms and other nonbank companies to buy troubled institutions.

The Office of the Comptroller of the Currency announced Friday that it would create a "shelf charter" to help private-equity firms receive preapproval for bank charters. Companies that are approved would be able to participate in the Federal Deposit Insurance Corp.'s bidding process for failing institutions.

"I see this as a way to have more capital going into troubled institutions and the FDIC having an enlarged pool of bidders for their failed institutions," said Julie Williams, first senior deputy comptroller and chief counsel for the OCC.

The agency said it had already granted the first such charter to Commerce Street Capital LLC, which, along with several other companies, is investing $1.38 billion in the creation of Ford Group Bank. Ms. Williams said the OCC has also been approached by a couple of other interested private equity companies.

The agency's action is a significant shift from the current process, which only allows depository institutions to participate in bidding. A broader field of bidders could mean less cost to the Deposit Insurance Fund and expand opportunities for private-equity firms to enter the banking business, Ms. Williams said.

"It's providing capital which will allow a healthy institution to provide credit and services to consumers where what they had before was a failing institution," Ms. Williams said.

"It's good for customers. It's good for business. It's new capital that can be deployed in a number of ways."

Ms. Williams said the OCC has been working for months to open up the process to private-equity companies.

"It did not make sense for a private-equity [company] to go out and charter a bank without knowing what … transaction they may enter into at the end of the day," she said.

"So we thought we needed a shelf charter — a charter on the shelf ready to go to [facilitate] acquisition[s of] troubled institutions."

The OCC said it will prereview private-equity companies, including evaluating the proposed management team, the capital available for a bank, and the proposed business plan.

The potential bidder would simultaneously apply to the Federal Reserve Board for preliminary approval to be a bank holding company.

The approved bank charter will be subject to the same conditions and requirements as any other charter. The OCC will decide whether a charter is approved, but the FDIC will continue to have the final say on bids.

"It basically gives a signal to existing banks or troubled banks that the parties they are negotiating with can pass the regulatory test to get the acquisition done," said Lawrence Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker LLP. "If you are getting one of these approvals, it's basically … akin to being preapproved for a mortgage. You have passed the initial test that your structure and management [are] acceptable to the regulator."

The OCC's move came after other efforts to encourage private-equity firms to invest in the banking sector. The Fed in September eased rules that limited private-equity investments in banking companies. The central bank allows private equity investors to hold up to a third of a bank's total shares but limited their voting rights.

Observers said the OCC's move would help give the banking system greater access to capital.

"Any time you free up additional equity to come into the banking industry, that is a good thing, and I think what the OCC has done is [to] make it easier for investors to buy up sick banks," said Mark Tenhundfeld, the senior vice president of regulatory policy at American Bankers Association.

He also brushed off any concern about the potential mixing of commerce and banking, arguing that the private entity would be subject to the same standards as banks.

"It would present another player, another bidder for a failed or failing bank, but in the final analysis I think the industry comes out better if we have more bidders for banks that need help," he said. "It helps in the sense that it brings additional sources of capital into the banking industry and permits them to act quickly to clean up a problem."

Observers also said this action is particularly helpful during this economic downturn, when capital is so scarce.

"Unless this economic downturn continues for a very long time and gets a lot worse, banks are relatively cheap right now, and it gives private equity an opportunity to come in and benefit from those lower costs and at the same time helps recapitalize the banking system," said Oliver Ireland, a partner in Morrison & Foerster LLP. "So I think it's a win-win situation."

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