Sunday, August 1, 2010

FDIC’s Mountain Of Failed Bank Assets Grow As Five More Banks Collapse


By Bill Zielinski on July 31st, 2010

July 30, 2010 - Five more banking institutions collapsed this week in Oregon, Washington, Florida and Georgia. Florida now leads the nation with 20 banking failures, followed by Georgia with 11.
All five of this week’s failed banks were acquired by other banking institutions under purchase and assumption agreements with the FDIC acting as receiver. The total assets of the five failed banks totaled $1.9 billion and the total estimated loss to the Federal Deposit Insurance Corporation’s Deposit Insurance Fund was estimated at $334.7 million.
As has been the case with almost all recent banking failures, the FDIC entered into loss-share transactions on the assets of failed banks purchased by the acquiring banks.
Under a loss-share transaction, the FDIC agrees to absorb losses on up to 80% of a failed bank’s assets that are purchased by an acquiring bank. The loss protection provides the incentive for private equity investors or other banks to purchase failed banks from the FDIC.
It will be some time before the results of the loss share programs can be evaluated, since certain assets are covered by loss share agreements for up to 10 years. The cost of expected losses on a failed bank’s assets covered by a loss share transaction is included in the FDIC’s estimated cost of a banking failure.
The ultimate gain or loss by the FDIC on their long tailed obligation to absorb losses on failed bank assets is impossible to predict. If property markets continue to decline in a poor economic environment, the eventual losses could far exceed the FDIC’s estimate. As previously discussed in ProblemBankList, as of June 2010, the FDIC has entered into 167 loss sharing agreements and the amount of assets guaranteed against loss has ballooned to $176.7 billion, potentially putting the taxpayers at substantial risk.
In addition to the open ended risk of loss-share transactions, the FDIC’s mountain of failed bank assets that could not be sold, despite the use of loss-share transactions, continues to grow. The FDIC is now holding a total of $39 billion in assets of failed banks that could not be sold and need to be disposed of. The ultimate loss to the FDIC on these mostly nonperforming loan assets is unknown, but will likely be correlated to the performance of the economy and property markets.
Two of this week’s banking failures (LibertyBank and The Cowlitz Bank) resulted in the FDIC being forced to retain $547.8 million of poor quality loan assets that could not be sold to the acquiring banks.