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 associations—the FDIC is appointed receiver, and the FDIC is responsible for resolving the failed institutions.
The FDIC uses a variety of business practices to resolve a failed institution. These 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 methods 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 uninsured depositors and other creditors of the failed institution.
The resolution process involves evaluating and marketing a failing institution, soliciting and accepting bids for the sale of the institution, determining which bid is least costly to the DIF, and working with the acquiring institution through the closing process.
To minimize disruption to the local community, the resolution process must be performed as quickly and smoothly as possible. There are three basic resolution methods used by the FDIC: 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. 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, 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 infrequently 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.
Financial Institution Failures
During 2012, there were 51 institution failures, compared to 92 failures in 2011. 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.
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 is marketed for sale within 90 days of an institution’s failure for cash sales and within 120 days for structured sales.
Structured sales for 2012 totaled $456 million in unpaid principal balances from commercial real estate and residential loans acquired from various receiverships. Cash sales of assets for the year totaled $1.1 billion in book value. In addition to structured and cash sales, FDIC also uses securitizations to dispose of bank assets. In 2012, securitization sales totaled $449 million.
As a result of our marketing and collection efforts, the book value of assets in inventory decreased by $3.9 billion (19 percent) in 2012.
Assets in Inventory by Asset Type
Dollars in Millions
Real Estate Mortgages
Net Investments in Subsidiaries
Structured and Securitized Assets
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 2012, the number of receiverships under management increased by 8 percent, as a result of new failures. The chart below shows overall receivership activity for the FDIC in 2012.
1 Includes five FSLIC Resolution Fund receiverships at year-end 2011 and three at year-end 2012.
Minority and Women Outreach
The FDIC relies on contractors to help meet its mission. In 2012, the FDIC awarded 1,326 contracts. Of these, 388 contracts (29 percent) were awarded to Minority- and Women-Owned Businesses (MWOBs). The total value of contracts awarded was $1.0 billion, of which $308 million (30 percent), were awarded to MWOBs, compared to 29 percent for all of 2011. In addition, engagements of Minority- and Women-Owned Law Firms (MWOLFs) were 18 percent of all engagements; total payments of $15.3 million to MWOLFs were 14 percent of all payments to outside counsel, compared to 17 percent for all of 2011.
In 2012, the FDIC exhibited at 23 procurement-specific trade shows to provide participants with the FDIC’s general contracting procedures, prime contractors’ contact information, and possible upcoming solicitations.
Prime contractors were reminded of the FDIC’s emphasis on MWOB participation and were encouraged to subcontract or partner with MWOBs. The FDIC also exhibited at 12 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 also met with MWOBs and MWOLFs in one-on-one meetings to discuss contracting opportunities at the FDIC. The FDIC continued to encourage MWOBs to register in the FDIC’s Contractor Resource List, which is used to develop source lists for solicitations. Any firm interested in doing business with the FDIC can register for the Contractor Resource List through the FDIC’s website.
In 2012, the FDIC’s Office of Minority and Women Inclusion (OMWI) participated with the other Dodd-Frank Act agency OMWIs in seven roundtable meetings nationwide with financial services industry groups, trade associations, and other consumer advocacy groups, to obtain input, guidance, and recommendations about strategies to implement standards for assessing regulated entities under Section 342 of the Dodd-Frank Act.
In 2012, the FDIC successfully closed three structured transaction sales. These three auctions combined to attract 19 entities that placed bids. Eight bidders had an MWOB firm as a member. The winning bidder for one of the transactions included an MWOB firm in the investor group. The FDIC continued outreach efforts to small investors and minority-owned and women-owned investors, and held five nationwide workshops on FDIC’s loan and Owned Real Estate (ORE) sales programs, and the structured loan sales program. The workshops were held in Chicago, Dallas, Los Angeles, Nashville, and New York, with more than 450 participants.
In 2013, the FDIC will continue to encourage and foster diversity and inclusion of MWOBs in procurement activities and outside counsel engagements, as well as promote strong commitment to diversity inclusion within its workforce, and with all financial institutions and law firms that do business with the FDIC.
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 2012, the FDIC paid dividends of $8 million to depositors whose accounts exceeded the insurance limit.
Professional Liability and Financial Crimes Recoveries
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 determined to be meritorious and cost-effective to pursue, the FDIC initiates legal action against the appropriate parties. During 2012, the FDIC recovered $337 million from professional liability claims and settlements. The FDIC also authorized lawsuits related to 48 failed institutions against 369 individuals for director and officer liability and authorized 21 other lawsuits for fidelity bond, liability insurance, attorney malpractice, appraiser malpractice, and securities law violations for residential mortgage-backed securities. There were 165 residential mortgage malpractice and fraud lawsuits pending as of year-end 2012. Also, by year-end 2012, the FDIC’s caseload included 88 professional liability lawsuits (up from 52 at year-end 2011) and 1,343 open investigations (down from 1,811 at year-end 2011).
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 with the U.S. Department of Justice, collected $4.6 million from criminal restitution and forfeiture orders during 2012. As of year-end 2012, there were 4,860 active restitution and forfeiture orders (down from 5,192 at year-end 2011). This includes 156 orders held by the FSLIC Resolution Fund, i.e., orders arising out of failed financial institutions that were in receivership or conservatorship by the Federal Savings and Loan Insurance Corporation or the Resolution Trust Corporation.