FOOTNOTES

^* Rosalind L. Bennett is a financial economist in the FDIC's Division of Research and Statistics.

¹ For the purposes of this article, the safety net refers to the deposit insurance system, the resolution of failed banks, and the liquidation of failed-bank assets.

² For simplicity, in this article the term "bank" refers to any deposit-taking financial institution.

³ Some locations have more than one deposit insurer. Not every question was answered by each respondent so there may be less than 37 responses to each question.

⁴ The classification of economies into "advanced," "developing," or "in transition" is from International Monetary Fund (2000). In the tables, the second and third categories are combined into one.

⁵ Articles summarizing and discussing the risk assessment and funds availability portions of the survey will appear in future issues of the FDIC Banking Review.

⁶ One example of these kinds of connections: how the appropriate authority will resolve a failed bank is affected by the funding of the deposit insurance scheme.

⁷ Typically, the FDIC places similar assets in pools and allows bidders to bid on the asset pools. Bidders have the option to bid on some or all of the asset pools and on some or all of the deposits of the failed bank.

⁸ The receivership process is similar to the bankruptcy process used in countries other than the United States. However, as discussed later in the article, the receivership process differs from the bankruptcy process in important ways.

⁹ In the resolution stage, the FDIC provides timely payment to the insured depositors; then, during the receivership process, the FDIC stands in the place of the insured depositors. Claimants on the receivership (including the FDIC itself, as the receiver that has administrative expenses and as the stand-in for the insured depositors) receive payment according to their assigned priority, as dictated by the Omnibus Budget Reconciliation Act of 1993; the relevant provisions are commonly known as National Depositor Preference. The priority is as follows: administrative expenses of the receiver, secured claims, domestic deposits (insured and uninsured), foreign deposits and other general creditor claims, subordinated creditor claims, and shareholders. For more detail on National Depositor Preference, see Marino and Bennett (1999).

¹⁰ The prompt corrective action provisions of FDICIA require the regulatory agency to close a bank that has a ratio of tangible equity to assets that is less than or equal to 2 percent.

¹¹ For more information on financial developments in the EU, see Murphy (2000).

¹² For evidence on the shifting of liabilities in large banks, see Marino and Bennett (1999).

¹³ When regulators refrain from taking actions that are normally required by statute, they are adopting a policy of forbearance. The reasons behind using forbearance can be complex. In the United States, regulators have applied forbearance successfully in the past to avoid a financial crisis. Forbearance, however, can create an opportunity for the troubled bank to deteriorate further and may therefore increase resolution costs.

¹⁴ For a discussion of early intervention, see European Shadow Financial Regulatory Committee (1998).

¹⁵ To engage in the business of deposit-taking in the United States, organizations must obtain a charter. The chartering authority for state-chartered banks is usually the state banking department; for national banks, the Office of the Comptroller of the Currency (OCC); and for federal savings institutions, the Office of Thrift Supervision (OTS).

¹⁶ FDICIA gave the FDIC the authority to close any bank that is considered to be critically undercapitalized and that does not have a plan to restore capital to an adequate level. FDICIA also gave the FDIC authority to close any bank that (1) has a substantial dissipation of assets because of the violation of law, (2) is operating in an unsafe and unsound manner, (3) is engaging in a willful violation of a cease-and-desist order, (4) is concealing records, or (5) is no longer insured. Twice the FDIC has closed banks and appointed itself receiver (see note 18). Section 8 of the Federal Deposit Insurance Act provides details of the conditions under which the Board of Directors of the FDIC can terminate deposit insurance.

¹⁷ Chapter 8 of FDIC (1998a) and Chapter 7 of FDIC (1998b) discuss the role of the FDIC as receiver in more detail.

¹⁸ The FDIC has appointed itself receiver twice since 1991: in 1994 and 1999. In 1994 the FDIC closed and appointed itself receiver of the Meriden Trust & Safe Deposit Company in Meriden, Connecticut. For more details, see FDIC (1998a), 181. In 1999 the FDIC closed and appointed itself receiver of Victory State Bank in Columbia, South Carolina.

¹⁹ On Table 3 and many of the subsequent tables, the total number of respondents differs from the sum of the total number of responses in each column because some deposit insurers gave more than one answer.

²⁰ FDIC (1998b), 64.

²¹ Before passage of FDICIA, resolution transactions were subject to a different type of cost test: the FDIC could resolve a bank using any transaction that was less costly than a deposit payoff, except that, if a bank was deemed to be essential to the provision of adequate banking services in the community, the FDIC could vary from the cost test and use a transaction that was more costly than a deposit payoff. Cost was always an important element of the decision on resolution structure, but other considerations (for example, avoiding disruption to the local community or passing more assets to the acquirer) sometimes influenced the choice. Under FDICIA, the FDIC no longer has that flexibility but is required to choose the least costly resolution transaction (except that a "systemic-risk" exception is possible, as discussed below).

²² The Board of Directors of the FDIC is composed of the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and three members appointed by the president of the United States and confirmed by the Senate. One of the appointed members of the Board must have experience supervising state banks. For more detail about the Board of Directors of the FDIC, see Section 2 of the Federal Deposit Insurance Act.

²³ Recurring losses characterized the case of First City Bancorporation. In 1988 the FDIC provided open-bank assistance to resolve the failure of 59 branches of First City, but the bank continued to incur losses. Finally, in 1992, the FDIC used a closed-bank transaction to resolve the bank.

²⁴ In the United States, banks that are interested in acquiring failed banks must have approval from their primary regulator and must meet the bid criteria established by the FDIC. The FDIC shares a list of eligible bidders with the other regulatory agencies and contacts potential bidders four or five days before the bank closing.

²⁵ For more detail on the types of P&A transactions the FDIC has used, see FDIC (1998b), chap. 3.

²⁶ Typically the acquirer will take the higher-quality assets and leave the distressed assets, such as nonperforming loans, in the receivership (see discussion of asset liquidation below).

²⁷ In the rare case when receivership proceeds remain after all the other claimants are paid in full, shareholders may recover some of their investment.

²⁸ Banks are generally closed at the end of business on Friday, and depositors are given access to their funds on the following Monday.

²⁹ For a discussion of the treatment of depositors at failed banks, see Kaufman and Seelig (2000).

³⁰ The FDIC Board of Directors selects the chief executive officer of the bridge bank and retains a presence on the bank's board of directors.

³¹ Most of the bridge banks created by the FDIC lasted less than seven months. For more detail on the FDIC's experience with bridge banks, see FDIC (1998a), chap. 6.

³² FDICIA contains provisions that explicitly define standards for asset disposition. In Section 123 (amending Section 11 of the FDI Act), FDICIA states that the FDIC shall conduct operations in a manner that (1) maximizes the net present value of return from the sale or disposition of assets, (2) minimizes the amount of any loss realized in the resolution of cases, (3) ensures adequate competition and fair and consistent treatment of those who submit bids for the assets, (4) prohibits discrimination on the basis of race, sex, or ethnic group in the solicitation and consideration of bids, and (5) preserves to the greatest extent possible the availability and affordability of residential real-estate property for low- and moderate-income individuals.

³³ This discussion focuses on the evolution of asset-liquidation contracts at the FDIC. For more information on the development of asset-liquidation and management contracts at the Resolution Trust Corporation (RTC), see FDIC (1998a), chap. 13.

³⁴ FDIC (1998a), 50.

³⁵ For details on the evolution of asset-disposition practices, see FDIC (1998b), chap. 12.

³⁶ For more details on the evolution of asset-disposition practices in the United States, see FDIC (1998a), chap. 12.

³⁷ For more information on representations and warranties, see Moreland-Gunn et al. (1995).

³⁸ For more detail on the use of equity partnerships in the United States, see FDIC (1998a), chap. 17.