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. Upon closure of an institution typically by its chartering authority—the state for state-chartered institutions, and the Office of the Comptroller of the Currency (OCC) for national banks, and federal savings associations4the FDIC is appointed receiver, and 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 either the resolution process or the receivership process. Depending on the characteristics of the institution, the FDIC may recommend several of these practices to ensure the prompt and smooth payment of deposit insurance to insured depositors, to minimize the impact on the DIF, 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.
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 Deposit Insurance National Bank (DINB) assumptions.
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. A variety of P&A transactions 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-share transaction, the FDIC as receiver agrees to share losses on certain assets 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 keeping 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 least-cost 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 authorizes 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. Though relatively seldom used, a DINB allows for a failed bank to be liquidated in an orderly fashion, minimizing disruption to local communities and financial markets.
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, structured transactions, and securitizations.
4OCC assumed this responsibility from the Office of Thrift Supervision (OTS) on July 21, 2011.
Financial Institution Failures
During 2011, there were 92 institution failures, compared to 157 failures in 2010. For the institutions that failed, the FDIC successfully contacted all known qualified and interested bidders to market these institutions. The FDIC also made insured funds available to all depositors within one business day of the failure if it occurred on a Friday and within two business days if the failure occurred on any other day of the week. 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 2009–2011
Dollars in Billions
Total Assets of Failed Institutions¹
Total Deposits of Failed Institutions¹
Estimated Loss to the DIF
¹ 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. Assets that are retained by the receivership are evaluated; for 95 percent of the failed institutions, at least 90 percent of the book value of marketable assets are marketed for sale within 90 days of an institution’s failure for cash sales and 120 days for structured sales.
Structured sales for 2011 totaled $2.8 billion in unpaid principal balances from commercial real estate and residential loans acquired from various receiverships. These transactions often involved FDIC-guaranteed and nonguaranteed purchase money debt and equity in a limited liability company shared between the respective receivership that contributed the assets to the sale and the successful purchaser. Cash sales of assets for the year totaled $1.1 billion in book value. In addition to structured and cash sales, FDIC also use securitizations to dispose of bank assets. In 2011, securitization sales totaled $1.1 billion.
As a result of our marketing and collection efforts, the book value of assets in inventory decreased by $6.1 billion (23 percent) in 2011. The following chart shows the beginning and ending balances of these assets by asset type.
Assets in Inventory by Asset Type
Dollars in Millions
Assets in Inventory 01/01/11
Assets in Inventory 12/31/11
Real Estate Mortgages
Net Investments in Subsidiaries
Structured and Securitized Assets
The FDIC uses contractors extensively to manage and sell the assets of failed institutions. Multiple improvements were made to controls over contractor costs and the quality of their deliverables, including the development of invoice review checklists, a standard contractor performance evaluation review process, and a series of peer-to-peer reviews.
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. In 2011, the number of receiverships under management increased by 27 percent, due to the increase in failure activity. The following chart shows overall receivership activity for the FDIC in 2011.
Active Receiverships as of 01/01/11¹
Active Receiverships as of 12/31/11¹
¹ Includes five FSLIC Resolution Fund receiverships.
Minority and Women Outreach
In 2011, the FDIC awarded 1,936 contracts. Of these, 558 contracts (29 percent) were awarded to Minority- and Women-Owned Businesses (MWOBs). The total dollar value of contracts awarded was $1.4 billion, of which $417 million (29 percent) was awarded to MWOBs, compared to 24 percent for all of 2010. In addition, engagements of Minority- and Women-Owned Law Firms (MWOLFs) were 30 percent of all engagements; total payments of $23 million to MWOLFs were 17 percent of all payments to outside counsel, compared to 10 percent for all of 2010. Policy modifications and contracting procedures have also resulted in the following changes and/or new initiatives:
The Office of Minority and Women Inclusion (OMWI) participates on contracting Technical Evaluation Panels as a voting member.
The FDIC entered into an MOU with the U.S. Small Business Administration to participate in their 8(a) Program in May 2011.
The FDIC issues some contracts on a regional basis, or allows contractors to bid on a subset of a contract, rather than requiring them to bid on the entire contract, in order to allow MWOBs and small businesses to be more competitive.
In 2011, the FDIC exhibited at 18 procurement-specific trade shows to provide participants with the FDIC’s general contracting procedures, prime contractors’ contact information, and possible upcoming solicitations. Prime contractors are reminded of the FDIC’s emphasis on MWOB participation and are encouraged to subcontract or partner with MWOBs. The FDIC also exhibited at seven non-procurement events where contracting information was provided. In addition, the FDIC’s Legal Division was represented at trade shows where information was provided to MWOLFs about outside counsel opportunities and how to enter into co-counsel arrangements with majority firms.
FDIC personnel frequently met with MWOBs and MWOLFs in one-on-one meetings to discuss contracting opportunities at the FDIC. MWOBs are encouraged to register in the FDIC’s Contractor Resource List, which is an online self registration system that can be accessed through the FDIC’s website by any firm interested in doing business with the FDIC. FDIC personnel use the Contractor Resource List to develop source lists for solicitations.
As a result of the Asset Purchaser, Investor, and Minority Depository Institutions Outreach seminars conducted in 2010, the FDIC developed an Investor Match Program (IMP). The IMP was launched in September 2011 to encourage and facilitate interaction between small investors, asset managers and large investors to bring sources of capital together with the expertise needed to participate in structured sales transactions. Two structured transactions workshops for Minority- and Women-Owned Investors and Asset Managers were held in New York, New York and Irvine, California. Information was presented on how structured transactions are planned and conducted, including an introduction and overview on the structured transactions process and bidder qualification procedures. In addition, speakers highlighted some key features of transaction documents, their experience in dealing with tax-related issues, as well as post-bid management oversight and the document reporting process.
The FDIC piloted a Small Investor Program (SIP) in 2011 to increase MWOB participation in accordance with Section 342 of Dodd-Frank. The SIP is geared towards marketing distressed loans under the structured sales program to smaller investors, many of whom are MWOBs. The SIP offers smaller-sized asset pools than a typical multi-bank structured loan sale. For this program, a pool of loans would typically be drawn from a single receivership resulting in the loan pool being secured by collateral in a more concentrated geographical area than would be found in a traditional, nationwide or regional multibank structured sale. The FDIC also adjusted the structure of the SIP to make offerings more accessible to smaller investors and to increase participation while maintaining a level playing field for all investors.
In 2012, as the FDIC winds down the operations of failed institutions and liquidates residual assets, the FDIC will continue to encourage and foster diversity and the inclusion of MWOBs in its procurement activities, outside counsel engagements, and asset sales programs.
Protecting Insured Depositors
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. During 2011, the FDIC paid dividends of $12 million to depositors whose accounts exceeded the insured limit(s).
Professional Liability and Financial
FDIC staff works to identify potential claims against directors, officers, fidelity bond insurance carriers, appraisers, attorneys, accountants, mortgage loan brokers, title insurance companies, securities underwriters, securities issuers, and other professionals who may have contributed to the failure of an IDI. Once a claim is deemed meritorious and cost-effective to pursue, the FDIC initiates legal action against the appropriate parties. During 2011, the FDIC recovered $240.4 million from professional liability claims/settlements. The FDIC also authorized lawsuits related to 30 failed institutions against 264 individuals for director and officer liability with damage claims of $5.1 billion. The FDIC also authorized 19 other lawsuits for fidelity bond, liability insurance, attorney malpractice, appraiser malpractice, and RMBS claims. There also were 189 residential mortgage malpractice and fraud lawsuits pending as of year-end. At the end of 2011, the FDIC’s caseload included 52 professional liability lawsuits (up from 27 at year-end 2010) and 1,811 open investigations (down from 2,750) at year-end 2010.
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 $3,633,426 from criminal restitutions and forfeitures during the year. At year-end, there were 5,192 active restitution and forfeiture orders (up from 4,895 at year-end 2010). This includes 294 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.