A Shared Loss Agreement (SLA) is executed at bank closing between the FDIC and the Assuming Institution. Under the terms of the SLA, the FDIC absorbs a portion of certain losses on specific assets purchased by the Assuming Institution. The percentage of losses absorbed by the FDIC varies according to the terms of the SLA. The Assuming Institution absorbs the remaining losses. A Shared Loss transaction keeps assets in the private sector, reduces borrower and market impact, and minimizes resolution costs.
Types of Shared Loss Assets (SLAs)
- Commercial: For commercial assets, the FDIC offers a range of shared loss coverage terms and provides coverage on certain credit loss events such as charge-offs.
- Single Family: For single family 1-4 residential assets, the FDIC offers a range of coverage terms and covers certain loss events such as settlement short sale, and foreclosure loss.
Shared Loss Publications
- Managing the Crisis: The FDIC and RTC Experience 1980–1994, Chapter 7
- Crisis and Response: An FDIC History, 2008–2013, Chapter 6
Frequently Asked Questions
| Questions and Answers |
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| What is Shared Loss? The FDIC and the Assuming Institution use a Shared Loss Agreement to share credit losses on the failed bank’s commercial and single family residential assets. The FDIC offers a range of credit loss coverage terms depending upon market conditions and types of assets. Potential Assuming Institutions can bid to receive FDIC shared loss coverage for eligible credit losses. Recoveries on loans that have experienced prior covered loss events are shared with the FDIC. |
What types of losses on the assets are covered and when does the FDIC reimburse the buyer for those losses? For single family assets, the Assuming Institution is reimbursed after the property is sold. For commercial assets, the Assuming Institution is reimbursed when the asset is written down in accordance with SLA guidelines or after the asset is sold. |
Does the FDIC receive any payments if the Assuming Institution receives any collections on assets with prior losses? Yes. If there are recoveries on assets which have previously been charged off by the failed bank or the Assuming Institution, the FDIC receives a percentage of the recoveries at a rate outlined within the SLA. |
Are Assuming Institutions permitted to conduct portfolio sales of Shared Loss assets? Yes, provided the Assuming Institution satisfies the terms and conditions of the SLA. |
What type of oversight does the FDIC have over the SLAs? The FDIC conducts quarterly asset level loss claim reviews and also requires the Assuming Institutions to undergo annual audits to ensure compliance with SLA requirements. The FDIC requires Assuming Institutions to provide detailed quarterly reports to monitor the performance of the assets. If an Assuming Institution is not in compliance with the SLA, the FDIC has the right to stop shared loss payments until the problem findings are resolved, and, in extreme cases, to require the Assuming Institution to sell the assets through a competitive bid process. |
How does an early termination work? Either the Assuming Institution or the FDIC may make an offer to terminate the SLA prior to its scheduled expiration date. The FDIC may, at its sole discretion, approve an early termination offer if the terms are less costly to the FDIC than the projected costs to continue the SLA for its full term. The process often begins with the Assuming Institution submitting an offer to terminate in writing. The FDIC evaluates the portfolios and estimates future losses and recoveries, which are modeled to account for the remaining term of the SLA. If the total projected costs of continuing the SLA are greater than the termination offer, and the Assuming Institution is in compliance with the terms of the SLA, the FDIC may accept the termination offer. |
Does Shared Loss put the taxpayer on the hook for additional losses down the road? No. Losses related to the failed bank are not paid by the taxpayer but instead are shared by the Assuming Institution and the FDIC’s Deposit Insurance Fund (DIF). The DIF is funded by assessments paid by insured banks and thrifts and NOT funded by the taxpayer. |
How does the FDIC know it is getting the best deal with Shared Loss? When preparing the sale of a failing bank, the FDIC reaches out to numerous potential bidders to bid for the customer deposits and the failing bank's assets. The sale relies on a confidential, competitive bidding process. To support this effort, the FDIC uses financial advisors to estimate asset values. After bids are received, the FDIC selects the least costly option. To facilitate this analysis, the FDIC may dictate the terms and conditions of an SLA, as well as the assets to be covered when potential Assuming Institutions bid on a failing bank. This allows the FDIC to expeditiously analyze and compare each of the bids to determine which is the least costly to the Deposit Insurance Fund (DIF). The terms and conditions also enable the FDIC to monitor the SLAs effectively. When market conditions are poor, shared loss can reduce losses to the DIF. SLAs enable the FDIC to sell the assets of the failed bank with the commitment to share future losses, without requiring the acceptance of lower market prices prevalent at the time. Assuming Institutions are often able to resolve troubled assets at a higher price once market conditions improve, sharing the higher recovery amount with the FDIC. |
Why doesn't the FDIC use Shared Loss for all failures? The FDIC has developed a variety of resolution methods designed to enhance the marketability of a failing bank. SLAs are just one of the resolution methods the FDIC has available. Market conditions are a major factor which influence the resolution types offered by the FDIC for each failing bank. By law, the FDIC must select the least costly resolution transaction for the failing bank. |
What can/should a borrower or banker do if they are having a problem with a Shared Loss Assuming Institution? Borrowers or other bankers with concerns should first initiate communication with the Assuming Institution for resolution. If unsuccessful in communicating with the Shared Loss Assuming Institution, borrowers or other bankers may request support from the FDIC as follows:
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