The FDIC has the unique mission of protecting depositors of insured banks and savings associations. No depositor has ever experienced a loss on the insured amount of his or her deposit in an FDIC-insured institution due to a failure. 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 — and the FDIC is appointed receiver, it is responsible for resolving the failed bank or savings association.
The FDIC has at its disposal and employs a variety of business practices to resolve a failed institution. These business practices typically fall under work associated with the resolution process or the receivership process. Depending on the characteristics of the institution, the FDIC may recommend several of these practices to ensure prompt and smooth payment of deposit insurance to insured depositors, to minimize impact on the Deposit Insurance Fund, and to speed dividend payments to creditors of the failed institution.
The resolution process involves valuing a failing institution, marketing it, soliciting and accepting bids for the sale of the institution, determining which bid is least costly to the insurance fund, and working with the acquiring institution through the closing process.
In order to minimize disruption to the local community, the resolution process must be performed quickly and as smoothly as possible. There are two basic resolution methods: purchase and assumption transactions and deposit payoffs. A third resolution option, open bank assistance transactions, generally can only be used in the event the bank’s failure would result in systemic risk.
The purchase and assumption transaction (P&A) is the most common resolution method used for failing institutions. In a P&A, a healthy institution assumes certain liabilities of the failed institution and purchases certain assets of the failed institution. Since each failing bank situation is different, P&A transactions are structured to create the highest value for the failed institution. Depending on the P&A transaction, the acquirer may either acquire all or only the insured portion of the deposits.
Deposit payoffs are only executed if a bid for a P&A transaction is not the least costly to the fund or if no bids are received, in which case the FDIC in its corporate capacity as deposit insurer, makes sure that the customers of the failed institution receive the full amount of their insured deposits.
The receivership process involves performing the closing functions at the failed institution, liquidating any remaining failed institution assets, and distributing any proceeds of the liquidation to the FDIC and other creditors of the receivership. In its role as receiver, the FDIC has used a wide variety of strategies and tools to manage and sell retained assets. These include but are not limited to asset sale and/or management agreements, partnership agreements, and securitizations.
Financial Institution Failures
Due to the economic environment, the FDIC experienced a significant increase in the number and size of institution failures as compared to previous years. For the institutions that failed in 2008, the FDIC successfully contacted all known qualified and interested bidders to market these institutions. Additionally, the FDIC marketed approximately 90 percent of the marketable assets of these institutions at the time of failure and made insured funds available to all depositors within one business day of the failure. There were no losses on insured deposits and no appropriated funds were required to pay insured deposits.
During 2008, 25 financial institutions failed. The chart below provides a comparison of failure activity over the last three years.
Failure Activity 2006 – 2008
(Dollars in billions)
Total Assets of failed Institutions*
Total Deposits of failed Institutions*
Estimated loss to the DIF
* Total Assets and Total Deposits data are based upon the last Call Report filed by the institution prior to failure.
Asset Management and Sales
As part of its resolution process, the FDIC makes every effort to sell as many assets as possible to an assuming institution and is generally successful. Assets that do remain in the receivership are evaluated and those that are determined to be marketable are marketed to be sold within 90 days of an institution’s failure.
In 2008, the book value of assets under management increased from $907.0 million to $15.1 billion. The following chart shows beginning and ending balances of assets by asset type.
Assets in Inventory by Asset Type (Dollars in millions)