By: Scott J. Kennelly & Janet C. Owens
Once a bank’s primary regulator has determined to close a bank, the Federal Deposit Insurance Corporation steps in to “resolve” it, usually by accepting appointment as the bank’s receiver. Before being formally appointed, the FDIC has typically engaged in substantial evaluation of the bank’s assets and liabilities and solicited bids from solvent banks or other entities that are interested in acquiring some or all of the soon-to-be-closed bank.
Once all bids have been submitted, the FDIC evaluates them in comparison to its estimated cost of liquidation to determine the least cost resolution. The purchase and assumption transaction, involving an agreement where a third-party institution purchases or some or all of the failed bank’s assets and liabilities, is the most frequently used and preferred method for resolving a failed bank. A transaction with the FDIC to purchase such assets and liabilities is not without risk to the acquiring, solvent institution. That institution is taking on assets of a bank that failed—and, while there may be some exceptions, banks that fail generally fail because they were having problems with many of their loans.