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1996 Annual Report
The FDIC has the unique mission of protecting depositors of insured banks and savings associations. No depositor within the insured limit of $100,000 has ever experienced a loss 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).
On July 1, 1995, the FDIC was given the responsibility for handling SAIF-insured institutions that close. Previously, the Resolution Trust Corporation (RTC) performed this function, which it took over from the former Federal Savings and Loan Insurance Corporation (FSLIC) on August 9, 1989. The FDIC also manages the remaining assets and liabilities of the former FSLIC and the former RTC.
In most cases, a depository institution is closed by its chartering authority when it fails to meet prescribed capital requirements or is insolvent. The state is the chartering authority for state banks and savings associations, the Office of the Comptroller of the Currency for national banks, and the Office of Thrift Supervision for federal savings associations. The FDIC works closely with all chartering authorities when dealing with institutions in danger of failing.
The FDIC is responsible for resolving a failing bank or savings association by using the least-costly method. Staff gathers data about the failing institution, estimates the potential loss from a liquidation, solicits and evaluates bids from potential acquirers, and recommends the least-costly resolution to the FDICs Board of Directors.
To handle the reduced levels of resolutions and liquidation activity projected for the near term more efficiently, the FDIC in December combined the two divisions that handle the bulk of failed bank and thrift activity. The new Division of Resolutions and Receiverships (DRR) will handle the responsibilities of the former Division of Resolutions and the Division of Depositor and Asset Services. For more information on this new division, click here.
During 1996, the FDIC resolved six institutions five insured by the BIF and one insured by the SAIF. One of the BIF-insured institutions, however, also had a portion of its deposits insured by the SAIF (this is known as an Oakar institution). The five BIF-insured failures, with combined assets of $183 million, were the fewest bank failures since 1974 when there were four. The one SAIF-insured institution that closed, with total assets of $35 million, was the first SAIF-insured failure since the FDIC took over that responsibility from the RTC. In the approximately six years the RTC was in operation, it resolved 747 failed SAIF-insured savings associations.
Purchase-and-assumption (P&A) transactions were used to resolve all six failures in 1996. In a P&A transaction, some of the assets of the failed bank or thrift are acquired by another institution along with all deposits, or just those within the $100,000 insurance limit. In two of the six failures, all deposits were assumed. In the remaining four, the acquiring institution assumed only the insured deposits; depositors with balances above the $100,000 insurance limit will receive a proportionate share of the proceeds from the liquidation of the failed institutions assets. (If a buyer for a failing institution is not found, the FDIC is responsible for making payments to the insured depositors of the failed institution. Payments are often made as soon as the next business day.)
To ease the burden on uninsured depositors, the FDIC may authorize advance dividends soon after an institution fails. The advance dividend is based on the estimated value of the receivership. The FDIC made advance-dividend payments of $4 million to uninsured depositors in two of the four failures in 1996 in which uninsured deposits were not assumed. This represented approximately 60 percent of the uninsured deposits in those cases. Generally, an advance dividend is not paid in cases in which the value of the failed institution cannot be reasonably determined.
When appropriate, as assets are liquidated, DRR makes subsequent dividend payments to uninsured depositors and general creditors of failed banks, including payments to the FDIC as a creditor for advancing funds for the payment of insured deposits at the time of an institutions failure. Total dividend payments during 1996 totaled $10.2 billion, which includes payments to creditors of institutions that failed in prior years. For more information about the resolution of the six failures of 1996, see this table.
DRR in 1996 unveiled the Standard Asset Valuation Estimation (SAVE) project, which provides consistent asset valuation methodology in the resolution and liquidation process by employing standard discounted cash flow models and valuation assumptions to the valuation of assets. SAVE methodology was used to calculate loss reserve estimations for assets held by the BIF, the SAIF, and the FSLIC Resolution Fund (FRF) as a part of the FDIC year-end 1996 financial statements.
Assets remaining after resolution are liquidated by DRR in an orderly manner and the proceeds are used to pay, to the extent possible, uninsured depositors and any remaining creditors. The FDICs ability to provide incentives for healthy institutions to assume deposits and purchase assets of failed banks and savings associations allows a portion of assets to be returned to the private sector immediately. The remaining assets are retained by the FDIC for later sale, loan workouts or other disposition. As a result of this effort, approximately 36 percent ($78 million out of $218 million) of the six failed institutions assets were sold at the time of closing.
In an effort to make the resolution process more efficient, the FDIC developed the Joint Asset Marketing (JAM) project. The goal of JAM is to increase competition in the resolution process by inviting parties not bidding on a failing institutions deposits to purchase assets of the bank or savings association at the time of resolution. This is expected to increase sales of assets at resolution, lowering the ultimate cost of the resolution.
In 1996, DRR also began providing for-sale information on assets retained from failures on the FDICs Internet home page (www.fdic.gov). The information includes: dates when loans and real estate will be offered for sale; lists of available real estate; and individual assets that have been sold.
DRR successfully settled, sold or otherwise resolved a significant portion of its asset inventory from failed institutions during the year as follows:
At year-end 1996, DRR was managing 30 assistance agreements and two of the former RTCs asset management and disposition agreements (AMDAs). The FDIC sometimes uses assistance agreements to resolve troubled or failing institutions. Although not used in 1996, assistance is generally either a one-time cash payment of capital or on-going payments over a period of time to cover losses incurred by the assuming bank on certain assets it took from the failing institution. Of these 32 agreements, five involved open bank assistance, 11 involved loss-sharing agreements, five comprised other types of assistance, two were AMDA limited partnership agreements and nine were Interim Capital Assistance Agreements the RTC entered into with minority institutions. DRR also monitored the general partners compliance with terms of 22 Judgment, Deficiency and Charge-off (JDC) partnerships, in which the FDIC is the limited partner and the general partner is from the private sector. The JDC partnership program places hard-to-collect assets in the private sector where they can be worked to maximize value.
When the RTCs unfinished work was transferred to the FDIC at the end of 1995, the FDIC assumed responsibility for the RTC affordable housing program. The combined program was revised in 1996 to meet standards for asset disposition set forth in the FDIC Improvement Act of 1991. The revised program includes: a 90-day period during which all single and multifamily properties designated as affordable housing are marketed exclusively to eligible individuals or organizations; an expanded clearinghouse program to provide property lists to potential buyers; and a technical assistance program to advise nonprofit organizations and public agencies when purchasing multifamily properties.
During 1996, the FDIC sold more than 3,266 affordable housing units from failed thrifts and banks for $39.9 million under this program. Sales included 46 multifamily and 455 single-family properties. Since 1990, the FDIC and RTC programs have had cumulative sales of more than 123,900 affordable housing units for $1.8 billion.
In addition, 32 state housing agencies and nonprofit organizations, acting under a memorandum of understanding with the FDIC, monitor 38,567 rental units for low- and very low-income households to ensure that purchasers are making units available to these households at adjusted rents as specified in the purchase agreement. These units originally were sold under the FDIC/RTC affordable housing program.
FSLIC Resolution Fund
The FDIC, through the FSLIC Resolution Fund (FRF), is responsible for managing and monitoring assistance agreements the former FSLIC entered into prior to August 9,1989. The FRF also is responsible for disposing of all remaining assets and liabilities of the former RTC, which were transferred to the FDIC on January 1,1996. The FRF, as successor to the FSLIC, receives federally appropriated funds. In 1994, the FRF was allocated $827 million, which is available until expended. Of that amount, $636 million was still available.
DRR, which is responsible for managing the assets and liabilities of the FRF, reduced the number of former FSLIC open cases to four from seven. The assistance agreements of the three closed cases were terminated before the contracted expiration dates. Other early terminations are expected to be closed out before the contracted expiration dates. These early terminations are expected to yield a cost savings of $1.1 million. Covered assets from the former FSLIC (those for which acquirers were guaranteed against loss and/or guaranteed a certain yield) at year-end 1996 were reduced to $261,000 from $108 million through sales and other adjustments. In addition, DRR is responsible for administering 24 terminated FRF agreements from the former FSLIC that have outstanding issues and 42 agreements that require monitoring and collecting tax benefits still due to the FRF. About $39.7 million in tax benefits were realized by the FRF in 1996.
Besides covered assets owned by others, the FDIC is responsible for liquidating FRF assets and liabilities that have been transferred to the FDIC. At year-end 1996, the FRF portfolio of assets in liquidation from the former FSLIC had a book value of $476 million, down from $1.5 billion at the end of 1995, despite the purchase of $534 million in assets during 1996 related to the early terminations. FRF net liquidation collections totaled $571 million for the former FSLIC in 1996.
The FRF also is responsible for disposing of the assets remaining from failed thrift institutions of the former RTC, managing the reserves (credit enhancements reserves) set aside to support the sale of securities collateralized by RTC assets, and repaying the RTCs debt from the Federal Financing Bank (FFB). At year-end 1996, the FRF portfolio of assets in liquidation from the former RTC had a book value of $4.4 billion, down from $7.7 billion at the end of 1995. During the same time period, reserves dropped from $6.8 billion to $5.8 billion, and FFB borrowings were reduced from $10.5 billion to $4.6 billion. The FDIC expects to recover sufficient funds from the RTCs receivership assets to cover the approximately $5 billion in RTC-corporate liabilities remaining at year-end.
The FRF will continue until all of its assets are sold or liquidated and all of its liabilities are satisfied. Any remaining funds will revert to the Department of the Treasury.
Professional Liability Recoveries
The FDICs 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. The Corporation investigates the circumstances surrounding the failure of every institution and, when appropriate, sends suspicious activity reports (SARs) to the Department of Justice. During 1996, a total of 93 new SARs were generated. In addition, the FDIC collected $25.5 million in criminal restitution.
Also during 1996, the Legal Division and DRR recovered $154.7 million from professional liability settlements or judgments. The FDICs caseload at the end of the year included investigations, lawsuits and settlement collections involving 244 institutions. This caseload includes RTC cases the FDIC assumed on January 1,1996.
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