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 sold with the resolution of the failing institution. The percentage of losses absorbed by the FDIC varies according to the terms of the SLA. The Assuming Institution absorbs the remaining losses. SLAs keep assets in the private sector, reducing borrower and market impact and minimizing resolution costs.
Types of 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 loan modification, short sale, and foreclosure loss.
Shared Loss Explained
This video explains the way the FDIC uses shared loss to maximize asset recoveries and minimizes the FDIC losses during the bank resolution process.
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
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Questions and Answers |
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What is Shared Loss? Under a Shared Loss Agreement (SLA), the FDIC absorbs a portion of the loss on a specified pool of assets sold through the resolution of a failing bank—in effect sharing the loss with the purchaser of the failing bank. |
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How does Shared Loss work? The FDIC uses two primary forms of Shared Loss Agreements: the first agreement supports commercial assets, and the second agreement supports residential mortgages. 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 varying percentages of FDIC loss coverage. Within the Commercial SLA, the FDIC provides coverage for qualified losses on commercial assets up to a stated threshold amount. Within the Single-Family SLA, the FDIC provides coverage on three basic single-family first lien mortgage loss events: loan modification, short sale, and foreclosure loss. Second liens are permitted to be charged off according to regulatory criteria when the first lien is not held by the Assuming Institution. For either agreement, recoveries on loans that have experienced prior covered loss events are typically shared in most instances, with negotiated percentages of the recovery going to the Assuming Institution and the FDIC. |
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Does Shared Loss put the taxpayer on the hook for additional losses down the road? No. When the FDIC calculates the estimated cost of a failure, all expected losses on the assets covered within SLAs are considered. These market assumptions are built into the cost of failure at the time of resolution. Thus, the cost of all expected future payments are recognized at the time of bank failure and no losses are deferred. Any future shared loss payments are made from receivership funds from the specific failed bank. If those funds are insufficient, shared loss payments are paid from the FDIC's Deposit Insurance Fund (DIF), which is funded by assessments paid by insured banks and thrifts (i.e. not from taxpayer funds). |
Does the FDIC receive any benefits if the Assuming Institution makes money on the covered assets? Yes. If there are recoveries on assets which have 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. |
What types of losses on the assets are covered and when does the FDIC reimburse the buyer for those losses? The FDIC shares credit losses with the Assuming Institution. The FDIC does not cover losses or expenses associated with changes in interest rates. Within the Single-Family SLA, the Assuming Institution is reimbursed when the loan is modified or the property is sold. Within the Commercial SLA, the Assuming Institution is reimbursed when the asset is written down according to established regulatory guidelines or when the asset is sold. |
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. In poor market conditions, shared loss can actually save the DIF money. 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 type of oversight does the FDIC have over the SLAs? The FDIC conducts annual reviews and regular monitoring of records of covered losses and overall compliance of Assuming Institutions with the SLAs. FDIC also requires Assuming Institutions to provide quarterly reports to ensure compliance with the program and to monitor the performance of the assets. In the event that 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 sell the assets through a competitive bid process. |
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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Where can I learn more about the history of Shared Loss? Additional information may be found from the following FDIC publications: |
How does the early termination program work? Assuming Institutions may approach the FDIC with offers to terminate SLAs prior to their expiration. FDIC’s decision for the early termination of SLAs comprises a review of a bank’s eligibility criteria, a financial evaluation, and supervisory concurrence. The FDIC may only approve an early termination offer if the terms are less costly to the FDIC than the projected costs of continuing the SLA for its full term. Early termination program parameters have changed over time, as market conditions have evolved and the Shared Loss Program has matured. The process begins with the Assuming Institution submitting an offer 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, subject to approval by the Assuming Institution's primary federal regulator, as well as the FDIC's Division of Risk Management Supervision. |
Are Assuming Institutions permitted to conduct portfolio sales of Shared Loss assets? Yes, if the FDIC provides prior written consent and the Assuming Institution satisfies the applicable provisions of the SLA. |