Thursday, January 10, 2008
regulatory hurdles of large capital infusion
--A patchwork of regulations and statutes involving banks makes outside investments particularly tricky. --For example, deals that leave a single investor owning 5% or more of a bank's shares can trigger regulatory scrutiny under the Bank Holding Company Act. While the Federal Reserve in the past has permitted some transactions that exceed that 5% threshold, the Fed also could subject the investor to periodic examinations or require it to maintain certain capital levels. Major funds are loath to open their books to regulators, and tying up their capital to meet regulatory requirements would prevent them from deploying it in more lucrative fashion. (The issue doesn't arise with Temasek's Merrill investment because Merrill isn't a commercial bank.) --For stakes of more than 10%, or if the outside investor would be represented on the bank's board, the regulatory hurdles become even more cumbersome. The Fed, along with the Treasury Department, also can investigate whether the investors planned to exercise coordinated control of the company. --As a result, financial institutions -- including Citigroup in its Abu Dhabi deal -- have taken pains to avoid the different regulatory thresholds that would attract more scrutiny. "They negotiate the contracts in light of the regulatory regime in the United States," said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics who has held top posts at the Fed and Treasury Department. "It's not an accident you get 9.9% and 4.9% and things like that. They are negotiating in the shadow of the Bank Holding Company Act." --Still, banking lawyers say it's possible to arrange major infusions without running into regulatory interference. Under one theory, sovereign-wealth funds should be regarded as government entities, not companies or investors -- and therefore the Bank Holding Company Act and other laws wouldn't apply in the same fashion.