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 OCC for national banks, and the 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 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.
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.
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 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 which 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.
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.
Financial Institution Failures
During 2010, the FDIC experienced a significant increase in the number and size of institution failures, 157, as compared to previous years. 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 2008–2010
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, and 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.
As a result of our marketing and collection efforts, the book value of assets in inventory decreased by $14.4 billion in 2010. 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 01/01/10
Assets in Inventory 12/31/10
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 2010, the number of receiverships under management increased by 84 percent, due to the increase in failure activity. The following chart shows overall receivership activity for the FDIC in 2010.
Active Receiverships as of 01/01/10¹
Active Receiverships as of 12/31/10¹
¹ Includes eight FSLIC Resolution Fund receiverships.
Minority and Women Outreach
The FDIC relies on contractors to help meet its mission to maintain stability and public confidence in the U.S. financial system. In 2010, the FDIC continued to host “Doing Business with the FDIC” and “Representing the FDIC” seminars. The FDIC conducted four seminars nationwide and reached out to Minority and Women Owned Businesses (MWOBs) and Minority and Women Owned Law Firms (MWOLFs) to inform them about the FDIC’s procurement and legal opportunities. In addition, FDIC staff served as panel members, exhibitors, and active participants in numerous events sponsored by trade and community organizations, and provided valuable information to attendees regarding the FDIC’s procurement process.
In 2010, the FDIC awarded 2,573 contracts, of which 522 contracts, or 20 percent, were awarded to MWOBs. The total value of contracts awarded was $2.6 billion, of which $641 million, or 24 percent, was awarded to MWOBs, compared to 32 percent for all of 2009. Lower award values in areas where there was strong MWOB participation in conjunction with increases in award dollars in areas where there was no MWOB participation resulted in an overall decrease in dollars awarded to MWOBs in 2010. In addition, the FDIC paid outside counsel $87 million for legal services, of which $8 million, or 10 percent, was paid to MWOLFs, compared to 3 percent for all of 2009.
Protecting Insured Depositors
With the increase in failure activity in 2010, the FDIC’s focus on protecting insured depositors of failed institutions was of critical importance. Confidence in the banking system hinges on deposit insurance, and no insured deposits went unpaid in 2010.
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 2010, the FDIC paid dividends of $5 million to depositors whose accounts exceeded the insured limit(s).
Professional Liability and Financial
FDIC staff works to identify potential claims against directors, officers, accountants, fidelity bond carriers, appraisers, attorneys, 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 the year, the FDIC recovered approximately $78 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 $6 million in criminal restitutions and forfeitures during the year. At the end of 2010, the FDIC’s caseload was composed of 153 professional liability lawsuits (up from 89 at year-end 2009) and 2,750 open investigations (up from 1,878) at year-end 2009. There also were 4,895 active restitution and forfeiture orders (up from 3,379 at year-end 2009). This includes 247 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.