A Shared-Loss Agreement is executed at bank closing between the FDIC and the Assuming Institution. Under the terms of the Agreement, 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 Agreement. The Assuming Institution absorbs the remaining losses. Shared-Loss Agreements keep assets in the private sector, reducing borrower and market impact and minimizing resolution costs.
Types of Shared-Loss Agreements (SLAs)
- For commercial assets, the FDIC offers a range of loss coverage terms, depending upon the market conditions and the location of covered assets. Commercial Shared-Loss Agreements are a 5 or 8 year term with typically 80% coverage to the Assuming Institution.
- For single family residential assets, the FDIC covers certain losses on loans and loan modifications for a 7 year or 10 year term with typically 80% coverage to the Assuming Institution.
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 an 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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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, it takes into account all expected losses on the assets covered in SLAs. These current 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 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). The DIF is funded by assessments paid by insured banks and thrifts, and it is not taxpayer funded. |
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How does shared-loss work? The FDIC uses two primary forms of Shared-Loss Agreements: the first agreement is for commercial assets, and the second agreement is for residential mortgages. For commercial assets, the SLAs typically cover an eight-year period: the first five years for losses and recoveries, and the final three years for recoveries only. The FDIC typically offers a range of loss coverage terms, depending upon the market conditions and the location of covered assets up to a stated threshold amount (generally the FDIC's dollar estimate of the total projected losses on shared-loss assets). Loss coverage may also be provided for loan or note sales, but such sales require prior approval by the FDIC. In most instances, recoveries on loans that experience loss events are split, with 20% of the recovery going to the Assuming Institution and 80% to the FDIC. For single-family mortgages, the SLAs are typically for ten years and have the same 80/20 split as the commercial assets. The FDIC provides coverage on three basic single-family first lien mortgage loss events: modification, short sale, and when the property is sold after foreclosure. Second liens are permitted to be charged off according to regulatory criteria when the first lien is not held by the Assuming Institution. Since the inception of SLAs, the basis for sharing losses with an Assuming Institution has undergone some change. Until March 26, 2010, the FDIC shared losses with Assuming Institutions on an 80/20 basis until the losses exceeded an established threshold defined in the SLA, after which the basis for sharing losses shifted to a 95/5 basis. Sharing losses on a 95/5 basis was eliminated for all SLAs executed after March 26, 2010. |
Does the FDIC receive any benefits if the Assuming Institution makes money on the covered assets? Yes. If there are recoveries on assets that have been charged off by the failed bank or the Assuming Institution, then the FDIC receives 80 percent of the recoveries. |
What types of losses on the assets are covered and when does the FDIC reimburse the buyer for those losses? The FDIC covers credit losses. The FDIC does not cover losses associated with changes in interest rates. For single-family loans, the Assuming Institution is paid when the loan is modified or the property is sold. For commercial loans, the Assuming Institution is paid when the assets are written down according to established regulatory guidelines or when the assets are sold. |
How does the FDIC know it is getting the best deal with shared-loss? When the FDIC is 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. In addition, the FDIC uses financial advisors to estimate asset values. After the bids are received, the FDIC selects the least costly option. To facilitate that analysis, the FDIC may dictate the terms and conditions of a shared-loss arrangement, 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 worsen, shared-loss can actually save the DIF money. As a result, established Shared-Loss Agreements enabled the FDIC to sell the assets, but without requiring acceptance of the low prices prevalent at the time. Instead, the FDIC sold the assets to Assuming Institutions at a discount. Incentivized under the SLAs to service and manage the assets, these Assuming Institutions resolved them at a higher recovery amount once market conditions improved splitting the higher recovery amount with the FDIC. |
How big is the Shared-Loss Program? How much money has the FDIC saved? During the recent financial crisis, the FDIC entered into 590 Shared-Loss Agreements with Assuming Institutions from 304 Failed Bank receiverships covering $216.4 billion in assets. The estimated savings exceed $41 billion, compared to an outright cash sale of those assets. |
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 to utilize. Market conditions dictate the resolution types the FDIC offers for each failing bank, and 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 on-site reviews and regular off-site monitoring of records of covered losses and overall compliance with the SLAs. It also requires Assuming Institutions to provide quarterly reports to ensure compliance with the program and to monitor the performance of the assets. Lastly, if the 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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Shared-Loss Publications |
How does the early termination program work? Banks periodically 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 only approves an early termination offer if the terms are less costly to the FDIC than the estimated costs of continuing with the SLAs for the duration of the contract. 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 engages a third-party Financial Advisor to value the portfolios and estimate future losses and recoveries, which are modeled to account for the remaining terms of the SLAs. If the total estimated costs of continuing the SLAs are greater than the termination offer and the Assuming Institution is in compliance with the terms of the SLA, the FDIC can accept the 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 consents and the Assuming Institution satisfies the applicable provisions of the Agreement. |