Resolutions and Receiverships
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, the FDIC is responsible for resolving the failed bank or savings association.
The FDIC employs a variety of business practices to resolve a failed institution. These business practices are typically 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 three basic resolution methods: purchase and assumption transactions, deposit payoffs, and utilizing a Deposit Insurance National Bank (DINB).
The purchase and assumption (P&A) transaction is the most common resolution method used for failing institutions. In a P&A transaction, a healthy institution purchases certain assets and assumes certain liabilities of the failed institution. There are a variety of P&A transactions that can be used. Since each failing bank situation is different, P&A transactions provide flexibility to structure deals that result in the highest value for the failed institution. For each possible P&A transaction, the acquirer may either acquire all or only the insured portion of the deposits. Loss sharing may be offered by the receiver in connection with a P&A transaction. In a loss sharing transaction, the FDIC as receiver agrees to share losses on certain loans with the acquirer. The FDIC usually agrees to absorb a significant portion (for example, 80 percent) of future losses on assets that have been designated as "shared loss assets" for a specific period of time (for example, five to ten years). The economic rationale for these transactions is that retention of shared loss assets in the banking sector can produce a better net recovery than would the FDIC's immediate liquidation of these assets.
Deposit payoffs are only executed if a bid for a P&A transaction does not meet the leastcost test 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 Banking Act of 1933 authorized the FDIC to establish a DINB to assume the insured deposits of a failed bank. A DINB is a new national bank with limited life and powers that allows failed bank customers a brief period of time to move their deposit account(s) to other insured institutions. A DINB allows for a failed bank to be liquidated in an orderly fashion, minimizing disruption to local communities and financial markets. Another resolution option, open bank assistance transactions, generally can only be used in the event the bank's failure would result in systemic risk.
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
The FDIC experienced a significant increase in the number and size of institution failures as compared to previous years. During 2009, 140 financial institutions failed. For the institutions that failed, the FDIC successfully contacted all known qualified and interested bidders to market these institutions. Additionally, the FDIC marketed over 80 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.
The following chart provides a comparison of failure activity over the last three years.
Failure Activity 2007–2009 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 on 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 generally is successful in doing this. Assets that are passed to 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.
Structured asset sales in 2009 included $1.3 billion of residential loans from Franklin National Bank. This transaction involved FDICguaranteed purchase money debt, and equity in a Limited Liability Company (LLC) shared between the receiver and the successful bidder.
The Corus Construction Venture LLC structured asset sale consisted of $4.5 billion of condominium and office construction loans from Corus Bank. In this transaction, the FDIC structured the purchase money debt at an initial term leverage of one-to-one to the bidders and structured the notes to be in the form of multiple bullet maturity notes guaranteed by the FDIC.
In 2009, the book value of assets under management increased by $26.2 billion to $41.4 billion. The following chart shows beginning and ending balances of assets by asset type.
Assets in Inventory by Asset Type Dollars in Millions
Assets in Inventory 01/01/09
Assets in Inventory 12/31/09
Real Estate Mortgages
Net Investments in Subsidiaries
Receivership Management Activities
The FDIC, as receiver, manages failed banks and their subsidiaries with the goal of expeditiously winding up their affairs. The oversight and prompt termination of receiverships help to preserve value for the uninsured depositors and other creditors by reducing overhead and other holding costs. Once the assets of a failed institution have been sold and the final distribution of any proceeds is made, the FDIC terminates the receivership estate. In 2009, the number of receiverships under management increased by 74 percent due to the increase in failure activity. The following chart shows overall receivership activity for the FDIC in 2009.
Active Receiverships as of 01/01/09*
Active Receiverships as of 12/31/09*
* Includes eight FSLIC Resolution Fund receiverships.
Minority and Women Owned Businesses
The significant increase in the number of financial institution failures over the last two years has resulted in the FDIC's increased reliance on contractors to assist in resolving receiverships created from failed financial institutions and liquidating their assets. In 2009, the FDIC made 1,212 contract awards totaling $2.66 billon; 376 (31%) of those awards, valued at $862 million (32%), were to minority and women-owned businesses (MWOBs). The FDIC promotes the inclusion of MWOBs in its procurement program, which relies on competitive bidding by invitation. The FDIC conducts outreach to encourage and inform MWOBs about the procurement process and opportunities for prime and subcontract awards. For 2010, the FDIC seeks to increase the number of awards and dollar value of the awards made to MWOBs in all racial, gender, and ethnic categories in the financial services industry.
Protecting Insured Depositors
With the increase in failure activity in 2009, the FDIC's focus on protecting deposits in institutions that fail was of critical importance. Confidence in the banking system hinges on deposit insurance, and no insured deposits went unpaid in 2009.
The FDIC's ability to attract healthy institutions to assume deposits and purchase assets of failed banks and savings associations at the time of failure minimizes the disruption to customers and allows assets to be returned to the private sector immediately. Assets remaining after resolution are liquidated by the FDIC in an orderly manner, and the proceeds are used to pay creditors, including depositors whose accounts exceeded the insurance limit. Effective October 3, 2008, through December 31, 2009, the standard maximum deposit insurance amount increased from $100,000 to $250,000, and this increase was later extended to December 31, 2013. During 2009, the FDIC paid dividends of $21.0 million to depositors whose accounts exceeded the insured limit(s).
Professional Liability and Financial Crimes Recoveries
The FDIC staff works to identify potential claims against directors, officers, accountants, appraisers, attorneys, and other professionals who may have contributed to the failure of an insured financial institution. Once a claim is deemed meritorious and cost-effective to pursue, the FDIC initiates legal action against the appropriate parties. During the year, the FDIC recovered approximately $53.5 million from these professional liability claims/settlements. In addition, as part of the sentencing process for those convicted of criminal wrongdoing against institutions that later failed, a court may order a defendant to pay restitution or to forfeit funds or property to the receivership. The FDIC, working in conjunction with the U.S. Department of Justice, collected $5.5 million in criminal restitutions and forfeitures during the year. At the end of 2009, the FDIC's caseload was composed of 25 professional liability lawsuits (up from 17 at year-end 2008) and 1,878 open investigations (up from 284). There also were 3,379 active restitution and forfeiture orders (up from 638 at year-end 2008). This includes 190 FSLIC Resolution Fund orders—i.e., orders inherited from the Federal Savings and Loan Insurance Corporation on August 10, 1989, and orders inherited from the Resolution Trust Corporation on January 1, 1996.