Tuesday, April 6, 2010

FDIC Loss Sharing Experience from the Last Big Crash

“Managing the Crisis: The FDIC and RTC Experience”

In 1998, the FDIC published the book "Managing the Crisis" detailing the FDIC and RTC experience from 1980 through 1994. Chapter 7 is devoted to loss share:


“The FDIC used loss sharing a total of 16 times to resolve 24 banks that failed between September 1991 and January 1993. Those 24 failed banks had total assets of $41.4 billion, of which approximately $18.5 billion were covered by loss sharing. Loss share transactions were extremely successful in keeping failed bank assets in the banking sector and out of the liquidation mode. Table I.7-5 illustrates that success by comparing the amount of assets passed to acquirers through the 24 loss share transactions to the amount of assets passed in the 175 banks that failed during 1991 and 1992 and were resolved using conventional P&A transactions. The loss share transactions accounted for $41.4 billion in failed bank assets and were able to pass to the acquirers $18.5 billion (45 percent) under loss sharing and another $17.8 billion (43 percent) without loss sharing. As a result, $36.3 billion (88 percent) of failed bank assets were passed to acquirers and only $5.1 billion (12 percent) of those failed bank assets were retained by FDIC for liquidation. The 175 P&A transactions during 1991 and 1992 that did not involve loss sharing accounted for $62.1 billion in failed bank assets and were able to pass just $24.3 billion (39 percent) of failed bank assets to the acquirer. As a result, $37.8 billion (61 percent) of those failed bank assets were retained for liquidation by the FDIC. Even though 122 banks, with total assets of $44.6 billion, failed in 1992, the FDIC, by using loss sharing, was able to halt the skyrocketing growth of assets in liquidation at $43.3 billion at year-end 1992. The FDIC was able to manage the situation by using loss sharing to keep assets out of the liquidation area, as well as by implementing improved asset disposition measures for assets that were in the liquidation phase. (See table I.7-6.)

The loss sharing transactions were less expensive than the P&A transactions without loss sharing. The 24 failed loss share banks had total assets of $41.4 billion and were resolved by the FDIC at a cost of $2.5 billion, or 6.1 percent of assets at the time of resolution. The 175 banks resolved by P&A without loss sharing had $62.1 billion in failed bank assets and were resolved by the FDIC at a cost of $6.5 billion, or 10.4 percent of assets at the time of resolution.

Loss share transactions were less expensive than conventional P&A transactions for large banks (total assets over $500 million), as well as for small banks (total assets under $500 million). The FDIC resolved 16 large banks with loss sharing and another 16 large banks using conventional P&A transactions. The large loss share banks had total assets of $39.2 billion and cost the FDIC $2.1 billion (5.38 percent of assets) to resolve. The large failed banks on which loss share was not used had total assets of $47.1 billion and were resolved at a cost of $4.1 billion (8.66 percent of assets). The FDIC resolved 8 smaller banks with loss sharing and 159 with conventional P&A transactions. The smaller loss share transactions had $2.2 billion in total assets and were resolved at a cost to the FDIC of $200 million (9.55 percent of assets). The 159 conventional P&A transactions had total assets of $15 billion and cost the FDIC $2.4 billion (15.82 percent of assets) to resolve. (See table I.7-7 for a summary of the cost of resolution on P&A transactions in 1991 and 1992.) The FDIC’s projected payments on the loss share assets are less than its original estimate of $1.4 billion. As of December 1997, the FDIC expected to make loss share payments of more than $1 billion, or just 74.3 percent of the amount originally forecast. By December 1997, the loss sharing period for 21 of the 24 failed banks covered by loss sharing agreements had either been completed or terminated. Less than $310 million of shared loss assets remained, representing less than 2 percent of the beginning book value for loss share assets. The estimated loss and recovery share payments on those remaining assets were included in the above cost calculations. The loss share transaction has been successful for the FDIC in the past and, should the need arise, is likely to be used in the future.”