FDIC Gets a Great Idea to Save US Banks: It Works with Non-bank Institutions for Mutual Benefit

The US Federal Deposit Insurance Corporation (FDIC) is reportedly considering allowing private equity firms and other non-bank institutions to participate in the purchase of failed banks' assets, thereby generating more money for the insurance fund and strengthening the bailout of failed banks.
In this way, these non-bank institutions would be eligible to buy these discounted assets, competing with other banks and in return for the FDIC's commitment to share losses, and the FDIC would be able to obtain higher bids through the participation of these non-bank institutions.
Since March this year, Apollo Global Management Inc., Blackstone Inc. and other non-bank institutions have been unable to acquire these discounted assets from the insolvent US regional banks. These companies are at a disadvantage in the auctions because they do not have banking licenses and therefore cannot bid for the entire lending institutions.
FDIC officials said the initiative would entice such firms to buy some of the loans and assets of failed institutions once more regional banks collapse. However, the FDIC does not regulate non-bank institutions, which could complicate the regulatory process for loss-sharing agreements.
Indeed, the involvement of private equity firms may go some way to alleviating the pressure on FDIC insurance funds by securing higher bids for the assets sold by the FDIC. The FDIC's Deposit Insurance Fund (DIF) has already seen a significant portion of its funds used during the recent banking crisis.
While non-bank institutions were not offered loss-sharing agreements during the recent banking turmoil, there is precedent for private equity firms in the past, particularly during the last financial crisis.
The regulator published a paper in 2021 examining the role of private equity in bailing out banks during the financial crisis. The researchers found that private equity invested heavily in underperforming and risky distressed banks and they calculated that if private equity had not stepped in, 5.5% more distressed banks would have ended up in liquidation.