Private equity firms will have to meet high Tier 1 standards if they want to purchase failed banks, according to rules put out by the Federal Deposit Insurance Corp. for comment last week. PE investors will have to both maintain a 15 percent Tier 1 ratio and keep acquired institutions for three years.

In a prepared statement, FDIC chairman Sheila Bair said she is “particularly concerned with new owners’ ability to support depository institutions with adequate capital, management expertise, and a long term commitment to provide banking services in a safe and sound manner.” While the PE/FDIC deals completed so far have included higher capitalization requirements and other add-ons, “some have suggested that the capital requirements should be even higher, given the difficulties in enforcing source of strength obligations outside the initial capital investment made by the acquirers in so so-called ‘shell’ structures,” added Bair.

The Private Equity Council warned that the rules would hamstring PE investment in troubled banks.

The move comes at a time when PE firms already seem to be shying away from the banking sector. In the latest sign of their reticence, Bancroft Capital, Orient Property Group, and “certain institutional investors” decided not to proceed with an equity stake in Temecula (Calif.) Valley Bancorp Inc., the bank announced on July 1. Douglas McDonald, president of Bancroft Capital, alluded to “the macro-economic factors at play and the continued deterioration in market fundamentals” as reasons for not moving forward.

Meanwhile, seven banks failed on Friday, bringing to 52 this year’s bank failures. The FDIC found new homes for all the institutions.

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