By Anthony Burke Boylan – The FDIC must be on the correct path with its recent changes to regulations for private equity firms who want to shop in the current banking industry fire sale. This can be assumed so soon after the new rules were announced for one simple reason: Neither side is happy, so that usually means somebody got something right.

Some 81 institutions already have been taken over by the Feds this year – the most since the S&L crisis of the 80s – so the pantry is full up on financial institutions, and there isn’t much room left in the cellar.

The number of banks on the FDIC’s confidential “problem list’’ leaped to 416 in June from 305 in the first quarter, the most since June of 1994.

With the concern that hundreds more banks could fail before the economy turns around, the FDIC had little choice but to find willing buyers to take over troubled institutions.

And it had to walk a fine line in doing so.

The FDIC needed to make troubled institutions palatable to investors willing to take a risk, but it’s no time to have banking novices jump into the business because it seems like a good idea – potentially extending the crisis.

It faced demands from advocacy groups – the Service Industry Employee Union chief among them -- to impose strict regulations, and a fierce onslaught from private equity industry’s lobbyists to allow them the same standards as regular banks

In the end the FDIC split the difference between its original proposal and the traditional banking rules.

Private equity banks will have to maintain 10% of its assets in high quality capital, known as tier 1 common equity. That’s twice the amount required of traditional banks, but a relief from the 15% in an initial proposal.

Banks purchased by private equity firms must be retained for at least three years as a safeguard against raiders who would strip an institution of any remaining value and leave it for dead.

The FDIC could impose even higher standards in special cases, and all private equity banks will undergo a capital review every six months.

Private equity banks also are barred from lending to any affiliated companies.

If private equity firms form partnerships with traditional banks, as encouraged in the FDIC plan, they could avoid the higher capital standard.

A consideration to require private equity firms to be a “source of strength’’ for their institutions in times of emergency – essentially having reserve capital outside the bank – was dropped.

It’s worth noting that the lone dissenter in the 4-1 vote on the new rules thought it was unfair make private equity banks face competitors who did not have to meet the same standards.

This is not a case of simply cutting the baby in half.

Finding a buyer before a bank fails saves the FDIC money from its shrinking insurance fund. Already the regulatory agency is considering imposing an additional premium on banks to shore up the fund.

Even with the banking industry expected to thrive in the long run, the FDIC needed to find a way to sell what are essentially damaged goods. There just aren’t enough interested buyers among the current banking industry, members of which still are fixing their own houses.

So the goods had to be made palatable.

Private equity firms have very little history running banks, but they do have a long history of taking over troubled ventures. And they have one of the rarest of all commodities in the current market: cash.

Of course the plan could wind up being a Faustian bargain if some opportunistic loophole was missed. That’s yet to be seen.

But regulators seem to have done the best they could given the situation. A New York Times editorial on the subject said the FDIC “ably navigated’’ the issue, as close as you get to praise these days.

Perhaps one more sign that the FDIC got it right, though it remains to be seen whether private equity will accept a level of control and restriction they’re not used to. Or, whether they’ll simply take their cash and look for investment opportunities that come with fewer strings.

The Wall Street Journal quoted a long-time private equity bank investor who groused about the inherent unfairness of the deal. However, when asked how he would handle the new regulations, he replied that his firm would be looking for banks to buy.

Anthony Burke Boylan is a financial journalist and a PR and media consultant in Chicago. Reach him at Tboylan@capitalinsight.com