WASHINGTON — Joseph Smith, the North Carolina commissioner of banks, said federal regulators should ease restrictions on private-equity capital to help the recovery of community banks.
During a speech Wednesday at the Exchequer Club, Smith said regulators are making it too difficult for private-equity firms to invest in banks, worsening problems for community banks attempting to raise private capital.
"Private-equity investors have shown an interest in investing in banks, sometimes only through the FDIC resolution process, but often in healthy banks, as a platform for participation in the resolution process or rolling up small banks or both," Smith said. "Regulatory applications by private-equity firms to engage in this activity have been subjected, as a rule, to a cumbersome, slow and sometimes insulting process that can best be compared to death by a thousand cuts."
The Federal Deposit Insurance Corp. issued guidance in August on private-equity investors' purchases of failing banks, including subjecting them to higher capital requirements than bank bidders.
Smith warned that keeping private equity away was causing more banks to fail. He said many institutions are trapped in a death spiral: ordered to raise capital and then unable to do so. "Regulatory incentives are aligned for an increase in failures and continued losses to the Deposit Insurance Fund," he said. "Stressed banks are told to raise enhanced levels of capital based on forward-looking supervisory approaches; sources of capital are inhibited or constrained by the regulatory process; resolution transactions are low-risk and highly profitable, so potential acquirers determine it is in their interest to wait until the distressed bank fails; they do and the bank does fail."
Smith, who is also chairman of the Conference of State Bank Supervisors, said that alternative sources of capital are not helping to fill the gap at small banks. Capital from the Troubled Asset Relief Program was designed for banks that didn't need it and stigmatized those that did take it, he said.
The administration has proposed a $30 billion capital program outside of Tarp for community banks that provide small-business lending. Though Smith said the program could be a valuable stabilizing tool, the plan so far has been controversial with lawmakers.
Smith was careful to not criticize the FDIC's efforts and noted the agency is constrained by prompt-corrective-action provisions that require it to take regulatory actions against troubled banks. He said lawmakers should amend the restriction to allow for more discretion.
"A change in policy can reduce the number of failures and facilitate a restructuring of the industry based on private investment and enhanced market discipline," he said. "By delaying or preventing investment, we will lose a good opportunity to heal our banks."
