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1998 Annual Report

Failed Institutions



The FDIC has the unique mission to protect depositors of insured banks and savings associations. No depositor has ever experienced a loss of insured funds in an FDIC-insured institution due to a failure. The FDIC protects depositors by managing the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The FDIC also manages the remaining assets and liabilities of the former Federal Savings and Loan Insurance Corporation (FSLIC) and the former Resolution Trust Corporation (RTC) through the FSLIC Resolution Fund (FRF).

Once an institution is closed by its chartering authority—the state for state-chartered institutions, the Office of the Comptroller of the Currency (OCC) for national banks and the Office of Thrift Supervision (OTS) for federal savings associations—the FDIC is responsible for resolving that failed bank or savings association. The Division of Resolutions and Receiverships (DRR) staff gathers data about the troubled institution, estimates the potential loss from a liquidation, solicits and evaluates bids from potential acquirers, and recommends the least costly resolution to the FDIC’s Board of Directors.

Protecting Insured Depositors
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Although the focus of the FDIC in recent years has shifted from resolving large numbers of failed institutions to addressing existing and emerging risks in insured depository institutions, the FDIC continues to protect deposits in those institutions that fail. The FDIC’s ability to attract healthy institutions to assume deposits and purchase assets of failed banks and savings associations minimizes the disruption to customers and allows some assets to be returned to the private sector immediately. Assets remaining after resolution are liquidated by DRR in an orderly manner and the proceeds are used to pay creditors, including depositors whose accounts exceeded the insured $100,000 limit, as well as the FDIC for repayment to the insurance fund.

During 1998, the FDIC resolved three BIF-insured institutions that failed. OmniBank, River Rouge, MI, with a total of $38 million in assets, was closed on April 9. The majority of the bank’s assets and all of the deposits were acquired under a "loss-share agreement" (explained in the next section). BestBank, Boulder, CO, with total assets of $318 million, was closed on July 23. Its insured deposits and certain assets were acquired by an assuming bank. Q Bank, Fort Benton, MT, with total assets of $14 million, was closed on August 7. The failed bank’s insured deposits and some assets were acquired by an assuming bank.

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Asset Disposition
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To keep as many of a failed institution’s assets in the private sector as possible (as opposed to being in a liquidation mode if left behind in receivership), the FDIC developed several new procedures and concepts. One such concept included opening the competition to bidders who might want to buy the troubled institution’s loans, but not its branches. The expansion of potential acquirers was designed to decrease the cost of failures through increased competition.

In addition, previously used resolution tools and methods were reintroduced. Typically used in larger transactions, the FDIC utilized the loss-sharing agreement with the OmniBank resolution. The loss-share transaction allows flexibility for the potential acquirers of failing banks. The structure provides for the FDIC and the acquirer to share future losses and recoveries on specified assets within a limited time from the failure—generally two years for loss-sharing, with recovery-sharing extending an additional year.

Assets not sold at the time of resolution are retained by the FDIC for later sale, workout or other disposition. During the year, the FDIC had reduced the book value of the combined FDIC/RTC assets in liquidation from $4.1 billion to $2.4 billion, a reduction of 42 percent. In addition to the $2.4 billion in assets in liquidation, the FDIC was also managing $6.7 billion in assets not in liquidation, consisting of cash, securitization reserves and residuals. During the year, 806 real estate properties were sold for a total of $148.7 million, which yielded a recovery of 88.9 percent of their average appraised value as determined by independent appraisers. Also, 6,545 loans and other assets were sold for a total of $203.8 million.

Photo of Managing the Crisis Symposium Regulators and former regulators, bankers and members of the academic community joined in a wide-ranging discussion at the April 29 FDIC- sponsored symposium “Managing the Crisis:   The FDIC and RTC Experience.”

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Receivership Management Activities
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Once the assets of the failed institutions have been sold and the final distribution of any proceeds made, the FDIC terminates the receivership estates. During 1998, the FDIC terminated 274 receiverships. Of these, 155 were RTC pass-through receiverships (where assets and liabilities are passed to an acquirer while certain claims were retained by the RTC as receiver), 14 were FRF receiverships (commonly referred to as "Southwest Plan" institutions), and the remaining 105 were BIF or FRF/RTC receiverships. A total of 140 receiverships are currently in termination status, which means that expenses are no longer charged to the receiverships in anticipation of their termination.

The FDIC in 1998 created a new team approach to administering receiverships. The Receivership Management Oversight program is designed to increase efficiency and reduce receivership costs. Each receivership created from a failed institution was assigned a team of experts to oversee the liquidation of the assets, manage the costs charged to the receivership and facilitate the receivership’s timely termination. These experts created a business plan for the receivership that broadly defined the anticipated life cycle of the receivership.

Table: Liquidation Highlights 1996-1998

The FDIC has also targeted specific older receiverships to be terminated by a streamlined process intended to resolve receiverships sooner. This streamlining was fully explored during the fourth quarter of 1998 and will be in place for 1999.

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Historical Studies
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During 1998, the FDIC continued its studies on the banking crisis of the late 1980s and early 1990s. In August 1998, DRR issued a publication entitled Managing The Crisis — The FDIC and RTC Experience. Virtually every division of the FDIC contributed to the study. This book provides a historical summary of the policies and procedures used by the FDIC and RTC in resolving the large volume of banks and thrifts that failed during the crisis. It studies the various asset disposition and bank resolution methods used and the lessons learned by both the FDIC and the RTC. This publication complements a previous study completed by the FDIC in 1997 entitled History of the Eighties—Lessons for the Future: An Examination of the Banking Crises of the 1980s and Early 1990s. The 1998 publication, which has been widely distributed, is accessible through the Internet and numerous libraries. The information from this study was the centerpiece of an FDIC-sponsored public symposium in April 1998.

A second book, entitled Resolutions Handbook, was also published in 1998 by the same FDIC groups that completed Managing the Crisis. This 90-page book focuses on the resolution process of bank failures. It relates the historical efforts and experience of the FDIC and RTC and is an aid for the many foreign governments that have requested the FDIC’s assistance. Numerous FDIC seminars involving participants from foreign countries have used or are expected to use this book as their reference guide.

These three publications establish permanent resource documents of the nation’s most troubled financial crisis since the Great Depression. In addition, as the United States is now being called upon to provide international fiscal guidance, these publications will aid countries that are now struggling through their own banking difficulties.

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FSLIC Resolution Fund
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The FRF was established by law in 1989 to assume the remaining assets and obligations of the former FSLIC arising from thrift failures before January 1, 1989. Congress placed this new fund under FDIC management on August 9, 1989, when the FSLIC was abolished. On January 1, 1996, the FRF also assumed the RTC’s residual assets and obligations.

Today, the FRF consists of two distinct pools of assets and liabilities: one from the former FSLIC (FRF-FSLIC) transferred on August 9, 1989, and the other from the former RTC (FRF-RTC) transferred to the FRF on January 1, 1996. The assets of one pool are not available to satisfy obligations of the other.

At year-end 1998, the FRF-FSLIC had resolution equity of $2.1 billion, and the FRF-RTC had resolution equity of $8.2 billion. The FRF will continue to exist until all of its assets are sold or liquidated and all of its liabilities are satisfied. Any funds remaining in the FRF-FSLIC will be paid to the U.S. Treasury. Any remaining funds of the FRF-RTC will be distributed to the U.S. Treasury to repay RTC Completion Act appropriations and to the REFCORP to pay the interest on the REFCORP bonds.

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Professional Liability Recoveries
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The FDIC’s Legal Division and DRR work together to identify claims against directors and officers, accountants, appraisers, attorneys and other professionals who may have contributed to the failure of an insured financial institution. During the year, the FDIC recovered more than $186.5 million from these professional liability suits. In addition, as part of the sentencing process for those convicted of criminal wrongdoing against failed institutions, the court may order a defendant to pay restitution to the receivership. The FDIC, working in conjunction with the U.S. Department of Justice, collected more than $17 million in criminal restitution and asset forfeiture during the year.

The Corporation also investigates the circumstances surrounding the failure of every institution and, where appropriate, sends suspicious activity reports to the Justice Department. In recent years, 6,434 such reports have been issued regarding failures. The FDIC’s caseload at the end of 1998 included investigations, lawsuits and ongoing settlement collections involving 141 institutions, down from 180 at the beginning of 1998. This caseload includes RTC cases that the FDIC assumed on January 1, 1996.


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