U.S. banking regulators partially retreated from a much-criticized proposal to impose new rules on private equity investment in troubled banks, aiming to encourage investments in distressed bank assets.

The 4-1 vote by the Federal Deposit Insurance Corp board was a partial victory for some regulators and potential investors who had warned that an initial proposal unveiled in July threatened to scare away much-needed capital.

FDIC Chairman Sheila Bair said the modified rules could still depress investor interest in failed banks but the guidelines needed to be strict enough to weed out irresponsible investors.

The FDIC recognizes the need for additional capital in the banking system, she said, but added: We do want people very serious about running banks.

A capital requirement for private equity investments in banks was lowered to a Tier 1 common equity ratio of 10 percent, from the 15 percent Tier 1 leverage ratio previously proposed.

The regulators also dropped a requirement that investors serve as a source of strength for the bank they buy, which critics said could have put them on the hook for more capital if the institution struggled.

A cross-guarantee proposal -- meaning if an investor owns more than one bank, the FDIC can use the assets of the healthier bank to cut losses from the one that has faltered -- was modified to only include investors that had an 80 percent common ownership of the two banks.

The rules will be further reviewed in six months.

U.S. bank regulators are increasingly looking to nontraditional investors -- such as private equity groups and international banks -- to nurse failed banks back to health as the number of insolvent institutions continues to rise, draining the FDIC's deposit insurance fund.

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.

On the whole, it's favorable to private equity. It's positive in terms of attracting private equity money, said Brett Barragate, a partner with the Jones Day law firm.

The dissenting vote was from acting director of the Office of Thrift Supervision, John Bowman, who said the revised policy was overly broad and imprecise. He also expressed unease at singling out private equity investors as a separate group.

Voting for the rules were Bair, FDIC Vice Chairman Martin Gruenberg, FDIC Director Thomas Curry and Comptroller of the Currency John Dugan.

Dugan had raised concerns in July about the initial version of the rules, but said he supported the new guidelines, describing them as significantly improved.

The FDIC on Wednesday also voted to extend by six months a program that guarantees transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.

It has improved overall liquidity throughout the banking system, Bair said.
The agency also said it would seek comment about whether to phase in the impact on banks' capital requirements of an accounting change that requires institutions to bring off-balance sheet assets back on their books.

(Reporting by Karey Wutkowski and Steve Eder; Editing by Tim Dobbyn)