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JOSEPH LAW NEWSBRIEF – Financial Regulation Update: Community Banks and Main Street Scoring Well Against Wall Street However Unknowns Persist

The U.S. Senate continues to debate the Dodd Bill also known as the Restoring American Financial Stability Act of 2010 (S. 3217).  Since the original procedural logjam was broken in the Senate on May 5, 2010, the Senate has debated twenty amendments and approved eleven changes. A few of the most important substantive votes have been widely reported such as the Shelby-Dodd Amendment, related to the “to big to fail” debate and the Sanders amendment regarding approval of a one-time audit of the Federal Reserve Board.  Few other amendments have received much fanfare, but they provide a glimpse of the final shape of the Senate version of the financial regulation legislation.  It seems apparent at this point in the legislative debate that the emerging legislation favors community banks and main street versus wall street and the money center banks.

Community banks were the recipients of rare bipartisan support that will change the way the FDIC charges banks to keep the deposit insurance fund fully solvent.  The method for calculating each banks deposit insurance premium as originally presented in the Dodd Bill would have favored the largest money center banks that have ready access to the capital markets.  Senator Jon Tester (D. Mt) tendered an amendment that was approved with 98 votes to require the FDIC to amend the definition of the term “assessment base” in a manner that would result in the larger, most leveraged banks paying a larger share of the insurance fund relative to smaller community banks, which tend to get their funding from deposits, not the capital markets.

Another amendment, authored by Senator Hutchison (R. Tex), also demonstrated the Federal Reserve’s muscle on capital hill.  Originally, the Fed would have been stripped of all direct regulatory authority over bank holding companies and state member banks with less than $50 billion in assets.  Hutchison’s amendment, which was approved with 90 aye votes, ensures that the regional Federal Reserve Banks will continue to regulate bank holding companies and member banks located in each of the regional banks’ jurisdictions. Senator Klobuchar, who supported the amendment, noted after passage that “The regional Federal Reserve bank system is a two-way street that both provides the Fed with valuable insight into local economies and serves as a voice for our community banks.”  It should be noted that the initial Dodd Bill eliminates the Office of Thrift Supervision (also known as the OTS).  It is likely that the OTS will cease to exist if the Senate ultimately approves a final financial regulation bill.

An amendment sponsored by Jeff Merkley (D. Or) and Amy Klobuchar (D. Mn), which was adopted with 63 votes, protects consumers from unsavory practices by some mortgage lenders by banning mortgage lenders and loan originators from receiving hidden payments when they steer homeowners into high cost loans.  Home buyers will still be allowed to finance their closing costs as part of their loan.   However, the mortgage industry scored improvements in the bill through the passage of a pair of amendments offered by Senators Landrieu, Isakson and Crapo. The amendments were designed to enhance the commercial mortgage backed securities (CMBS) market and support single family real estate markets by allowing more flexibility in connection with risk retention requirements associated with commercial loans and securitization of well underwritten single family home loans.

Dick Durbin (D. Ill) was able to obtain passage of another little noticed provision, created to rein in the largely unregulated debit card market, in a vote taken last Thursday, May 13, which could prove to be another major win for consumers and smaller debit card issuers. The final vote was supported by many Democrats, but it also picked up enough Republican votes (64 aye votes) to presage the potential final vote in the Senate on the Dodd Bill in the next few weeks.  The amendment would place interchange fees — the money taken by debit card issuers and banks when making a purchase using a debit card — under purview of the Federal Reserve. Specifically, the Fed would be required to set rules ensuring that the fees are reasonable and proportional to the actual processing costs.  The amendment would also allow merchants to offer discounts for customers to use competing card networks and for customers to pay by cash, check or debit card.

Recently, it was reported in the New York Times that interchange fees cost households an average of $427 in 2008. Most American consumers are steadily increasing debit card use. Unlike credit-card transactions, debit transactions involve no risk for card companies since the money is being drawn directly from bank accounts.  With debit card markets dominated by a few big companies, there has been no incentive for the fees to be lowered. This is why the Fed’s authority to make the fees “reasonable” will benefit consumers. Some banking industry observers have voiced a fear that smaller debit card issuers will be adversely impacted although the final Durbin amendment exempted debit cards issued by institutions with under $10 billion in assets.

A final battle is shaping up over the Merkley-Levin amendment introduced by Democratic Senators Merkley and Carl Levin (MI).  It would rein in proprietary trading (i.e. stocks, bonds, options, commodities and derivatives) by banks, bank holding companies and their affiliates and bar them from investing in or sponsoring a hedge fund or private equity fund.  “Systemically important” nonbanks (such as Goldman Sachs and AIG) would be subject to increased capital requirements to decrease the risks posed by speculative trading and the amendment would prevent investment banks from betting against securities they offer to their clients (which is being called the “Goldman rule”).  As of the date of this writing, the final vote on this provision is too close to call.  Public Citizen is tracking the vote at

If Senate Bill 3217 is passed it is likely to dramatically effect the final legislation that would then be crafted in the conference committee session with the House of Representatives based on their version of the bill which was passed in 2009.

For more information please contact Jonathan Joseph at 415.817.9200.

This communication is provided as a general informational service to clients and friends of Joseph Law Corporation.  It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed herein do not guarantee similar outcomes.  © 2010 Joseph Law Corporation.  All Rights Reserved.

JOSEPH LAW NEWSBRIEF: FDIC Paves the Way for Private Investors to Recapitalize Troubled Banks and Bid for Failed Banks

The recently announced high profile recapitalization of Pacific Capital Bancorp by investor Gerald Ford and affiliates, coupled with the newest FAQ issued by the FDIC on April 23, 2010, indicates that private equity now has several paths to successfully enter the queue for failed bank acquisitions and troubled bank recapitalizations.  However, it is also clear that the FDIC, as gatekeeper, is primarily opening the door to “patient” money invested by “anchor groups” who are willing to subject themselves to federal bank agency scrutiny.  It remains extremely important for such potential investors to engage qualified bank regulatory attorneys and consult closely and early with the FDIC staff as every prospective transaction will inevitably involve a variety of significant bank regulatory and policy judgments.

At the end of August 2009, the FDIC promulgated its Policy Statement for Failed Bank Acquisitions (“Policy Statement”).  It provided that covered private equity investors will be required to hold their investments in subject institutions for a three year period and agree to other restrictions not applicable to non-covered organizations that acquire failed banks.  On January 6, 2010, the FDIC issued Questions and Answers (“Initial FAQ”) to interpret portions of the Policy Statement. Both the Policy Statement and the Initial FAQ appeared to signal the FDIC’s discomfort with the supervisory risks associated with private investors participating in failed bank acquisitions.  As a result, the ability and willingness of private equity investors to participate in the huge recapitalization needs of the banking industry were stymied.  By default, existing banks and thrifts and their holding companies were favored in connection with failed bank acquisitions.

On April 23, 2010, the FDIC issued new Questions and Answers (“April FAQ”) to clarify elements of the Policy Statement and the Initial FAQ.  The April FAQ helped to clarify, among other things,  the “one-third test” first discussed in the Policy Statement, the applicability of the Policy Statement to “less than 5% investors” and requirements for offshore investors. Additionally, and perhaps most significantly for existing “troubled banks,” the FDIC provided a reasonably clear test of when recapitalizations of existing banking organizations will be exempt from the Policy Statement. As a result, a road map now exists for private investors to participate in failed bank acquisitions and recapitalizations of existing banks.

Private equity investors that are seeking to participate in so called “inflatable” banks or “platform” banks (i.e., smaller healthy banks that are super capitalized with the intention to acquire assets of failed or troubled banks) may find one element of good news in the April FAQ.  The recapitalization standard mentioned above provides that the Policy Statement will not apply to investors if a recapitalized institution acquires one or more failed bank in an eighteen month period following recapitalization if the acquired assets in the aggregate are less than 100% of the recapitalized organization’s total assets.   In the final analysis, the Initial FAQ and the April FAQ make clear that private investors wishing to flip their investments or make quick profits will face overwhelming obstacles.  On the other hand, private investors with a long term investment horizon may now potentially enter the banking arena.

Private equity contemplating investments in existing banking organizations will need to clearly understand the restrictions and limitations in the Policy Statement if the institution they invest in anticipates exceeding the “100% of total assets” threshold.   While the FDIC has offered more clarity about the one-third test and recapitalizations, ambiguity regarding the rules in this area is  still plentiful.  Our sense is that bank holding companies and banks seeking to rely on the recapitalization exemption, should probably commit to private investors in recapitalizations that future bank acquisitions will be structured so that the Policy Statement will not apply.  At this point in the economic cycle, banking organizations and private equity investors must work closely together in consultation with the banking agencies, qualified bank regulatory and transactional lawyers and investment bankers in order to wisely and pragmatically manage the complex legal, regulatory and business risks that exist in the current banking environment.



  • FDIC, Final Statement of Policy on Qualifications for Failed Bank Acquisitions, August 26, 2009 (
  • FDIC, Questions and Answers Posted January 6, 2010 (
  • FDIC, Additional Questions & Answers Proposed to Address Recent Questions – April 23, 2010 (added to the January 6, 2010 Q&As).


This communication is provided as a general informational service to clients and friends of Joseph Law Corporation. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed in the material do not guarantee similar outcomes.  © 2010 Joseph Law Corporation.  All Rights Reserved.

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