Monday, March 29, 2010

FIG Partners LLC: Will the FDIC's new Loss Sharing arrangements for failed bank bidding really change the cost of closing a bank?

Will the FDIC’s changes to the Loss Sharing Arrangements yield higher prices to the FDIC, or just new angles on bidding? We understand the regulatory agency is removing the 95%/5% loss share coverage, as well as the use of specific thresholds. In its place, the FDIC will ask failed bank bidders to bid on the first tranche loss amount, which could be a positive number that banks have to pay upfront. However, banks may also increase the amount of negative bid to compensate them for their perceived risk bearing on an FDIC-assisted transaction. In fact, the law team at Jones Day suggests more buyers could boost their negative bid and opt out of loss sharing altogether (which may prove cheaper!).

We suspect that certain bank closings will be quite competitive and the new loss sharing terms lower the FDIC’s loss to the DIF (deposit insurance fund) and the cost to the U.S. taxpayer. But, there remain many, many small banks for which real bidders are necessary. Here, the bidders may just move their numbers around and derive the same economic cost. Or, maybe it really is better for some banks to scrap their plans for loss sharing and eliminate the hassles of the FDIC’s paperwork.