FDIC seeks stronger rules for sale of failed banks

Two Illinois banks were shuttered Thursday as government regulators proposed new rules for private equity firms seeking to take over failed banks.

Regulators shut down John Warner Bank of Clinton, Ill., and First State Bank of Winchester in Winchester, Ill., bringing to 47 the number of U.S. bank failures this year.

The Federal Deposit Insurance Corp. was appointed receiver of both John Warner Bank and First State Bank.

Deposits of John Warner Bank were acquired by Lincoln, Ill.-based State Bank of Lincoln.

Three John Warner Bank offices were to reopen on Friday as branches of State Bank of Lincoln, the FDIC said in a statement.

As of April 30, The John Warner Bank had total assets of $70 million and total deposits of approximately $64 million. In addition to assuming all of the deposits of the failed bank, State Bank of Lincoln agreed to buy about $63 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimated that the cost to the Deposit Insurance Fund will be $10 million.

The deposits of State Bank of Winchester were acquired by The First National Bank of Beardstown, Ill.

Two offices will reopen on Monday under the new bank name.

As of April 30, The First State Bank of Winchester had total assets of $36 million and total deposits of approximately $34 million. The First National Bank of Beardstown also agreed to buy about $33 million of assets. The FDIC says the cost to the Deposit Insurance Fund will be $6 million.

The two closings bring to eight the number of Illinois banks closed this year.

Under new rules proposed Thursday by the FDIC, private equity firms seeking to buy failed banks would face strict capitalization and disclosure requirements, but some regulators already warn the proposal may go too far.

The FDIC is seeking to expand the number of potential buyers for the growing number of banks it has closed during the financial crisis. With mounting interest from private equity firms, whose methods and motives aren't always clear, the FDIC is trying to set requirements to ensure the banks won't fail again.

One of the new proposals under discussion would require investors to maintain a healthy amount of cash in the banks they acquire, keeping them at about a 15-percent leverage ratio for three years. Most banks have lower leverage ratios, which measure capital divided by assets.

Investors also would have to own the banks for at least three years and face limits on their ability to lend to any of the owners' affiliates.

Regulators said their intent was to tap into the potentially deep source of private equity, while ensuring that banks remain well capitalized once they are sold.

"We want nontraditional investors," FDIC Chairman Sheila Bair said at the board meeting. "There is a significant need for capital and there is capital out there."

Still, some regulators worried that the rules could stifle a potentially valuable new source of investment. Bair said the proposal was "solid," but acknowledged that some details, including the high capital requirements, could be controversial.

Comptroller of the Currency John Dugan said that the rules, which will now be subject to public comment, may be too restrictive.

The proposals will be subject to a 30-day public comment period, after which the bank regulators likely will meet again to finalize the rules, said FDIC spokesman David Barr.

The FDIC monitors the health of banks to ensure that they have enough capital to stay afloat and cover their deposits. When banks get in trouble, the FDIC can seize and sell them. Prior to Thursday, the FDIC already had closed 45 banks this year, many of them community or regional institutions. That compares with 25 failures last year and three in 2007.

The FDIC already has brokered two sales this year to entities controlled by private equity firms. In March, the government sold IndyMac Federal Bank for $13.9 billion to a bank formed by investors that included billionaire George Soros and Dell Inc. founder Michael Dell.

But the business practices and ownership of the lightly regulated pools of investor funds often can be difficult to penetrate. The FDIC proposals include requirements meant to pry some information out of the investors, including disclosing the owners of private equity groups. The FDIC rules also would prevent the groups from using overseas secrecy laws to shield details of their operations.

Under the regulations, banks also would not be sold to investors with so-called "silo" structures that make it hard to determine who is behind a private equity group.

The FDIC had 305 banks with $220 billion of assets on its list of problem institutions at the end of the first quarter, the highest number since the 1994 savings and loan crisis.

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AP Business Writer David Pitt reported from Des Moines, Iowa.