The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per deposit per bank. Funds in non-interest bearing transaction accounts are fully insured, with no limit, under the temporary Temporary Liquidity Guarantee Program|Transaction Account Guarantee Program. However, not all banks are participating in the TLGP/TAGP.
On January 1, 2014  the standard coverage limit will change to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner.
Insured deposits are backed by the full faith and credit of the United States.(12 U.S.C. section 1828(a)(1)(B)). Accessible online from Cornell law: US Code: Title 12,1828. Regulations governing insured depository institutions
The vast number of bank failures caused by runs on the bank in the Great Depression spurred the United States Congress to create an institution to guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund(DIF).
The FDIC insures accounts at different banks separately. For example, a person with accounts at two separate banks (not merely branches of the same bank) can keep funds up to the insurance limit in each account and be insured for the total deposited. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) are considered separately for the insurance limit. Under the Federal Deposit Insurance Reform Act of 2005, Individual Retirement Accounts are insured to $250,000.
Bank Holding Company Act
FDIC approves final securitization "safe harbor"
- Source: FDIC Approves Final Securitization Safe Harbor Cadwalader, September 28, 2010
On Monday, September 27, 2010, the Federal Deposit Insurance Corporation (the “FDIC”) approved its final rule1 (the “Rule”) regarding amendments to its securitization “safe harbor rule.”2
The Rule ostensibly was approved to bring the FDIC’s existing securitization safe harbor into line with the Financial Accounting Standards Board’s newly promulgated FAS 166 and 167 governing sale accounting treatment, which went into effect for reporting periods beginning after November 15, 2009.3
Through adoption of the Rule, the FDIC seeks to use its authority to repudiate contracts when a Bank fails as the basis for comprehensively regulating the issuance and servicing of Bank related asset backed securities in connection with a securitization or a participation occurring after December 31, 2010.
Notably, in approving the Rule, the FDIC has imposed new substantive securitization requirements as a condition to utilizing the safe harbor for securitizations by insured depository institutions (each, a “Bank”), without regard to whether the transaction qualifies for sale accounting treatment under FAS 166 and 167.
FDIC enhances existing backup authorities
- Source: FDIC Enhances Existing Backup Authorities Over Insured Depository Institutions Alston & Bird, July 12, 2010
Today, the FDIC’s board of directors unanimously approved a revised Memorandum of Understanding (MOU) with the other federal banking agencies that will increase the FDIC’s backup supervisory authority over certain insured depository institutions (IDIs). FDIC Chairwoman Sheila C. Bair explained that the FDIC will have “a more active on-site presence and greater direct access to information and bank personnel in order to fully evaluate the risks to the deposit insurance fund” and “be prepared for all contingencies.” Among other things, the MOU broadens the scope of the FDIC’s backup authority to include a greater number of institutions and authorizes the FDIC to establish and maintain full-time staff at the site of each covered institution.
The MOU, last updated in 2002, delineates the responsibilities and authorities of each agency. The FDIC and Treasury Inspectors General, in an April 2010 report on the Washington Mutual failure, criticized the MOU for requiring the FDIC to excessively rely on the primary federal regulator and restricting the FDIC’s ability to independently assess the risk to the Deposit Insurance Fund (DIF). Senator Carl Levin (D-MI), as chairman of the Permanent Subcommittee on Investigations, echoed these views in connection with hearings on the failure of Washington Mutual.
FDIC Chairwoman Bair stated that the FDIC “has no interest in infringing upon [the] authorities [of the primary regulator],” but explained that the FDIC has “needs that are separate and distinct,” including, for example, the need to measure loss severity and distance to default, ensure solvency of the DIF by setting deposit-insurance prices, and facilitate the orderly resolution of failed institutions. Outgoing Comptroller of the Currency John C. Dugan issued a statement supporting the MOU, but emphasized the “critical” necessity that “nothing be done to undermine the primary supervisory responsibility and accountability of the primary regulator.”
The revised MOU extends the FDIC’s regulatory scope to include the following institutions:
- “Problem IDIs” – IDIs which are undercapitalized or have a composite rating of 3, 4 or 5.
- “Heightened Insurance Risk IDIs” – IDIs considered to be higher risk under the insurance pricing system (determined by reference to the IDI’s CAMEL rating and percentile initial assessment rate).
- “Large Banks” – Mandatory Basel II “Advanced Approach” IDIs and IDI subsidiaries of any non-bank financial company or large interconnected bank holding company recommended for heightened prudential standards under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
- “TLGP Borrowers” – IDIs that are affiliated with entities that have had greater than $5 billion of borrowings under the FDIC’s Temporary Liquidity Guaranty Program.
The MOU authorizes the FDIC to conduct independent investigations or sit in on investigations conducted by the primary federal regulator. Further, the scope of the FDIC’s supervisory function is no longer limited to the banking division of the IDI. It may review all divisions in order to adequately assess systemic risk and the potential impact on the DIF. Targeted reviews of problem IDIs and heightened insurance risk IDIs will be conducted primarily to assess the risk to the DIF. At large banks and TLGP borrowers, the FDIC may establish a continuous, full-time, on-site presence of up to five members of FDIC staff for certain institutions with at least $750 billion in total assets and up to three members of FDIC staff for other large, complex institutions.
- Source: FDIC Announces Open Door Policy for Upcoming Rulemaking Process Alston & Bird, August 12, 2010
Earlier today, the FDIC announced that it will have an “open door policy” with regards to the upcoming rulemaking process related to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FDIC believes that this “open door policy” will make it easier for the public to participate in the rulemaking process.
FDIC Chairman Sheila C. Bair stated that she felt that “We owe it to the public to have an open door policy so that people can see for themselves how financial services reform is going to be implemented."
Changes under the new policy include:
- The public will be able to participate even before rules are drafted and proposed.
- Meetings between senior FDIC officials and private sector individuals will be publicly disclosed, as will the names and affiliations of the private sector individuals involved in the meetings.
- FDIC will hold a series of roundtable discussions on implementation issues, which will be available via webcast.
- People may submit their views on implementation via email, and these comments will be posted on the FDIC website.
- FDIC will provide bill summaries and a fact sheet on a website which will be updated regularly.
FDIC budget up 56% for 2010
- FDIC Boosts 2010 Budget, Staff as Bank Failures Rise Bloomberg, December 15, 2009
The Federal Deposit Insurance Corp., overseeing the dissolution of failed banks at the fastest pace in 17 years, today boosted its 2010 budget 56 percent to $4 billion to manage further shutdowns.
The total budget will increase from $2.6 billion and the budget for handling bank failures doubles to $2.5 billion from $1.3 billion this year, according to a budget proposal the FDIC board approved in Washington. The agency staff will increase to 8,653 next year from 7,010 for this year.
The budget “will ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions,” FDIC Chairman Sheila Bair said in a statement.
Bank failures have climbed to 133 this year, the most since 1992, as soured commercial-real estate loans and mortgage defaults hobbled U.S. lenders. The agency has hired staff to handle the surge, which pushed the deposit insurance fund to an $8.2 billion deficit in the third quarter.
The additional 1,643 FDIC staff will include 1,559 temporary workers and 84 permanent employees, with a majority of positions added to the division that handles bank failures.
“What we’re dealing with here, in effect, is an emergency response to the crisis,” FDIC Vice Chairman Martin Gruenberg said during discussion about hiring of temporary staff scheduled next year.
U.S. banks will pay more than $45 billion on Dec. 30 covering premiums through the next three years under an agency plan approved Nov. 12 to replenish the fund.
“Our operating budget does not come from taxpayers,” Bair said during the meeting. “We are completely self-funded in that regard.”
The FDIC insures deposits at 8,099 institutions with $13.2 trillion in assets. The agency’s insurance fund reimburses customers for deposits of as much as $250,000 when a bank fails.
The FDIC has 552 banks with $345.9 billion in assets on its confidential problem list as of Sept. 30, a 33 percent increase from 416 lenders with $299.8 billion in assets the previous quarter, the agency reported last month.
4Q 2009 FDIC financial report
- Source: Fourth Quarter 2009 CFO Report to the Board FDIC, March 3, 2010
- The year-end financial results presented in this report are unaudited. We expect our external auditor, the U. S. Government Accountability Office, to conclude their audits of the FDIC financial statements in April.
- For the fourth quarter of 2009, the Deposit Insurance Fund (DIF) balance decreased by $12.6 billion (153 percent) to negative $20.9 billion. This decrease was primarily due to a $17.8 billion increase in the provision for insurance losses, which was partially offset by a $3.1 billion increase in assessment revenue. Although the fund balance decreased in the fourth quarter, the unrestricted cash and cash equivalents increased by $45.5 billion, primarily due to the collection of prepaid assessments.
- During the fourth quarter of 2009, the FDIC was named receiver for 45 failed institutions. The combined assets at inception for these institutions totaled approximately $64.9 billion with a total estimated loss of $10.0 billion. The corporate cash outlay during the fourth quarter for these failures was $7.8 billion. The FDIC entered into loss-share agreements with the acquiring institution for 34 of these receiverships, with expected loss-share payments due to the acquirers of approximately $6.4 billion over the length of the agreements.
- For the year ending December 31, 2009, expenditures from the Corporate Operating Budget and the Investment Budget ran below budget by 9 percent ($226.8 million) and 2 percent ($0.1 million), respectively. The variance with respect to the Corporate Operating Budget was primarily the result of lower spending for contractual services in the Receivership Funding component of the budget. For the information technology projects that make up the Investment Budget, detailed quarterly reports are provided separately to the Board by the Capital Investment Review Committee.
FDIC cancels planned fee rise
- FDIC Lowers Bank Failure Cost Estimates; Adopts DIF Plan CCH Federal Banking Law Reporter, October 19, 2010
The Federal Deposit Insurance Corp. now expects the cost of bank failures in the period 2010 to 2014 to total about $52 billion, down from its estimate of $60 billion projected in June.
At an Oct. 19, 2010, meeting, FDIC staff said the lower estimate largely reflected strong bidding for failing banks, and a higher number of unassisted problem bank resolutions. Given the lower loss projections, the FDIC estimates that the Deposit Insurance Fund (DIF) reserve ratio could reach 1.15 percent by the end of 2018, even without a 3-basis-point assessment rate increase scheduled to take effect Jan. 1, 2011.
Consequently, the FDIC board approved a plan to restore the DIF reserve ratio to 1.35 percent by Sept. 30, 2020—required under the Dodd-Frank Wall Street Reform and Consumer Protection Act—that foregoes the 3-basis-point rate increase and keeps the current rate schedule in effect.
FDIC staff noted that, under the Dodd-Frank Act, the FDIC is required to offset the effect of rate increases on smaller institutions. Therefore, rates applicable to all institutions initially need to be set only high enough to reach 1.15 percent, they said, adding that the mechanism for reaching 1.35 percent by the 2020 deadline can be determined separately.
Meanwhile, the FDIC board also approved a notice of proposed rulemaking that would implement a long-range policy for implementing the DIF.
Under the Dodd-Frank Act, the reserve ratio upper limit of 1.5 percent was removed, allowing the FDIC to grow the fund to a size sufficient to withstand a crisis. At the meeting, FDIC staff recommended, and the board approved, a proposal to set a long-range minimum goal for the reserve ratio of 2 percent.
The proposal also calls for adopting a lower assessment rate schedule when the reserve ratio reaches 1.15 percent, so that the average rate over time would be about 8.5 basis points. It also states that, in lieu of dividends, lower rate schedules are adopted when the reserve ratio hits 2 percent and 2.5 percent allowing for average rates to decline about 25 percent and 50 percent respectively.
FDIC Chairman Sheila Bair noted that while it is difficult to make long-term projections, “we are trying to give the industry greater certainty regarding what rates will be over the long run. The trade off we are proposing is lower, more stable and predictable premiums, but a higher reserve.”
- FDIC Delays a Fee Rise Wall Street Journal, June 23, 2010
Banks to pre-pay 2009-2012 assessments
- Source: FDIC Board Approves Proposed Rule to Seek Prepayment of Assessments; Extends Deposit Insurance Fund Restoration Plan Alston and Bird, September 29, 2009
In order to "shore up the resources of the Deposit Insurance Fund (DIF)," and to address "its need for cash to pay for projected failures," the FDIC Board of Directors took the following actions:
- Adopted a further revised Amended Restoration Plan that contemplates, among other things, no further special assessments.
- Approved a Notice of Proposed Rulemaking that would require insured institutions to prepay their estimated fourth quarter 2009 and full-year 2010 through 2012 assessments.
- U.S. banks to prepay fees to cover failure costs Reuters, November 12, 2009
- Source: Bank of America, 3 Other Banks’ FDIC Fees May Top $10 Billion Bloomberg, September 29, 2009
"...The Federal Deposit Insurance Corp.’s plan to bolster its reserves may cost Bank of America Corp. and three of the largest U.S. banks more than $10 billion.
Bank of America, the biggest U.S. lender by deposits, may owe $3.5 billion under the FDIC proposal for banks to prepay three years of premiums, based on the lowest assessment rate multiplied by the bank’s $900 billion in second-quarter U.S. deposits.
“This seems like a very hefty amount,” said Tim Yeager, a finance professor at the University of Arkansas and former economist at the Federal Reserve Bank of St. Louis. “The FDIC’s projections of future losses are pretty severe, and they are trying everything they can to avoid tapping the Treasury.”
U.S. bank premiums range from 12 cents per $100 in deposits for the safest lenders to 45 cents for banks the U.S. considers risky, said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America. The FDIC proposed asking banks to pay premiums for the fourth quarter and next three years on Dec. 30. The fees will raise $45 billion.
The FDIC is required by law to rebuild the fund when the reserve ratio, or the balance divided by insured deposits, falls below 1.15 percent. It was 0.22 percent on June 30 and will sink to a deficit tomorrow. The fund, drained by 95 bank failures this year, had $10.4 billion at the end of the second quarter. The fund will erase its deficit by 2012, the FDIC said today.
Based on the current assessment and each bank’s deposits, Wells Fargo & Co.’s fee may be $3.2 billion based on its $814 billion in deposits, JPMorgan Chase & Co. may pay $2.4 billion and Citigroup Inc. $1.2 billion. The estimates exclude the FDIC’s plan to boost the assessment rate by 3 cents per $100 in deposits in 2011 or the agency’s assumption that bank deposits will increase by 5 percent annually.
Banks won’t record the premiums as an expense on Dec. 30, making the prepayments more palatable, Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, said on a Bloomberg TV interview.
The expense for prepaying will be recorded during the next three years, lessening the impact on earnings, said Brad Milsaps, an analyst at Sandler O’Neill and Partners LLP in Atlanta. “I don’t think it’s going to be a problem overall, though for the stressed banks that need cash, it could be,” he said. Banks will record a cost when the payments would be due.
Bank of America reported $140 billion in cash as of June 30, while JPMorgan, Wells Fargo and Citigroup each had more than $20 billion, according to regulatory filings."
- US weighs how to rebuild depleted bank insurance fund Reuters, September 22, 2009
- Interview and discussion with Paul Miller of the FBR Capital Markets. He says FDIC is capable of handling bank failures. Bloomberg News video (running time - 3:30 minutes), August 28, 2009
U.S. ‘problem’ banks soar, lending drops, FDIC says
- Source: U.S. ‘Problem’ Banks Soar, Lending Drops, FDIC Says Bloomberg, February 23, 2010
"U.S. “problem” lenders climbed to the most in 17 years in the fourth quarter, and the Federal Deposit Insurance Corp. fund protecting customers against failures posted a wider deficit, the agency said.
The FDIC included 702 banks with $402.8 billion in assets on the confidential list as of Dec. 31, a 27 percent increase from 552 banks with $345.9 billion in assets at the end of the third quarter, the regulator said today in a quarterly report. “Problem” banks account for 8.7 percent of all U.S. lenders.
“The growth in the number and assets of institutions on the problem list points to a likely rise in the number of failures,” FDIC Chairman Sheila Bair said today at a Washington news conference. “Both the problem list and bank failures tend to lag behind economic recovery.”
Regulators are closing banks at the fastest pace since 1992, seizing 20 lenders through seven weeks this year after shutting 140 institutions in 2009 amid loan losses stemming from the collapse of the home and commercial mortgage market. A total of 28 banks failed in 2007 and 2008 combined.
“The pace is going to pick up this year and is going to exceed where we were last year,” Bair told reporters.
The insurance fund deficit widened to $20.9 billion from $8.2 billion in the previous quarter, when the account had its first negative balance since 1992. The FDIC last year required banks to prepay three years of premiums, raising $46 billion on Dec. 30, the agency said today. The fourth-quarter balance doesn’t reflect the payments, as premiums are to be phased in each quarter during the next three years, the agency said..."
- http://bit.ly/d5sTzs McClatchy, March 8, 2010
Special Assessment, Restoration Plan
- Source: Special Assessment, Restoration Plan and Proposal for Maintaining Fund Liquidity FDIC memo to the Board of Directors, September 28, 2009
Staff recommends that:
- The FDIC not impose additional special assessments in 2009.
- The FDIC maintain assessment rates at their current levels through the end of 2010 and immediately adopt a uniform 3 basis point increase in assessment rates effective January 1, 2011.
- The FDIC establish and implement the attached Amended Restoration Plan to extend the restoration period from seven to eight years.
- The FDIC authorize publication of the attached Prepaid Assessments Notice of Proposed Rulemaking and Request for Comment that would require insured institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter 2009 and for all of 2010, 2011 and 2012. Staff estimates that total prepaid assessments would amount to approximately $45 billion.
...Pursuant to these requirements, staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative. This reflects, in part, an increase in provisioning for anticipated failures. In contrast, cash and marketable securities available to resolve failed institutions remain positive...
..Staff has also projected the Fund balance and reserve ratio for each quarter over the next several years using the most recently available information on expected failures and loss rates and statistical analyses of trends in CAMELS downgrades, failure rates and loss rates. Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009. Staff projects that most of these costs will occur in 2009 and 2010...."
FDIC votes to accept comments insurance rate link to risk assessment
- Source: FDIC Assessments April 13, 2010
SUMMARY: The FDIC proposes to amend 12 CFR part 327 to revise the assessment system applicable to large institutions to better differentiate institutions by taking a more forward-looking view of risk; to better take into account the losses that the FDIC will incur if an institution fails; to revise the initial base assessment rates for all insured depository institutions; and to make technical and other changes to the rules governing the risk-based assessment system.
FDIC votes to accept comments insurance rate link to bank pay
January 12, 2010
Today, the FDIC voted 3-2 to accept comments on a proposed rule to link FDIC insurance premiums to executive compensation practices. The two no votes were Comptroller John Dugan and OTS Chief John Bowman. The yes votes were Sheila Bair, Martin Gruenberg, and Thomas Curry.
3-2 votes at the FDIC are uncommon, which means that this is a significant split in the regulatory community. I will be sending more information soon on how you can have an impact if it is something you care about.
Interestingly, one of Dugan’s arguments is ‘let the Fed do it’. Zach Carter wrote a good profile on Dugan, if you are looking for background on him.
- Source: FDIC eyes linking levies to bank pay Financial Times, January 7, 2010
"US banks’ contributions to a multibillion-dollar fund that insures depositors’ savings could be linked to regulators’ assessment of bank pay plans, under preliminary discussions being held by top banking watchdogs.
People familiar with the situation said that the talks were at an early stage and no decision had been made.
The Federal Deposit Insurance Corporation said on Wednesday that its board, made up of top banking regulators, would meet next Tuesday to consider proposed rules on “employee compensation”. The FDIC did not specify what it would discuss and declined to comment further.
However, one of the issues under consideration is whether regulators should seek information about lenders’ compensation policies, how they affect banks’ risk profiles and whether certain pay structures should be taken into account when assessing FDIC insurance fees, according to people briefed on the discussions.
Any proposals are likely to be targeted to specific structures that are deemed to increase or reduce risk.
For example, “clawback” provisions that allow a bank to recoup bonuses if they were based on trades or deals that proved unprofitable could reduce a lender’s assessment, under one of the proposals being discussed. In some cases, however, a pay structure could lead to higher fees.
Last year, US banks paid more than $17bn into the FDIC fund, which insures deposits up to $250,000.
The move is the latest attempt by regulators to weigh in on banks’ pay policies, which have been blamed for encouraging inappropriate risk-taking and helping to fuel the financial crisis. Bankers’ pay has been a controversial issue because the US government injected billions of dollars of taxpayers’ money to bail out some of the country’s largest lenders.
Both domestic regulators, such as the Federal Reserve and the Securities and Exchange Commission, and international bodies have issued guidelines aimed at reining in excessive pay and linking compensation to long-term performance. The SEC passed rules last month forcing companies to provide much more information on pay.
The FDIC’s initiative, however, is significant because it could provide banks with a strong incentive to bring their pay structures in line with the regulators’ wishes and hefty penalties if they do not. It also has the potential to affect a larger number of banks as most of the country’s lenders have to pay the FDIC levy.
Bank executives have long complained about the FDIC levy and the way it is calculated but during the crisis their protests grew louder as the regulator increased the fee to pay for the rising number of bank bankruptcies."
- FDIC insurance plan could hit bankers in their wallets Associated Press, January 12, 2010
FDIC and Bank of England Memorandum of Understanding
- Source: MEMORANDUM OF UNDERSTANDING CONCERNING CONSULTATION, COOPERATION AND THE EXCHANGE OF INFORMATION RELATED TO THE RESOLUTION OF INSURED DEPOSITORY INSTITUTIONS WITH CROSS-BORDER OPERATIONS IN THE UNITED STATES AND THE UNITED KINGDOM Bank of England website, signed at Basel, January 10, 2010
In view of the growing globalization of the world's financial markets and the increase in cross-border operations and activities of financial service firms, including large complex insured depository institutions, the United States Federal Deposit Insurance Corporation ("FDIC") and the United Kingdom Bank of England ("Bank") have reached this Memorandum of Understanding ("MOU") on the exchange of information and cooperation in resolving troubled cross-border insured depository institutions. The FDIC and the Bank express, through this MOU, their willingness to cooperate with each other in the interest of fulfilling their respective ("\ statutory objectives, in the areas of resolving troubled insured depository institutions with crossborder effects and maintaining confidence and systemic stability.
US banks reprieved as cap rules set for phase-in
Source: US banks reprieved as $900bn reg cap rules set for phase-in Euroweek, 28 August 2009
"US regulators this week moved to give some breathing space to banks that would otherwise have to bring almost $900bn of securitised assets back on to their balance sheets following changes to accounting rules at the beginning of 2010.
The full impact of FAS 166 and 167, which eliminate the qualifying special purpose entity concept previously used to keep most US securitisations off balance sheet, would require banks to hold full regulatory capital at the start of the year. But the regulators, led by the Federal Reserve and the Federal Deposit Insurance Corp, have launched a consultation to phase in the requirement.
The draft notice of proposed rulemaking remains agnostic on many aspects but if adopted, the schedule would require banks hold capital against 25% of the consolidated assets in the first quarter — or the existing capital charge for residual exposure and credit enhancement if higher — 50% in the second quarter, 75% in the third quarter, and 100% in the fourth quarter. The new accounting rules will eliminate the current carve-out for certain consolidated asset backed commercial paper programmes, which allows banks to hold risk based capital only against their contractual obligations.
The regulators also propose to reserve the authority to treat unconsolidated special purpose entities as on balance sheet for capital purposes where deconsolidation "is not commensurate with the actual risk relationship of the banking organisation to the entity".
The consultation asks banks to provide comments and evidence on a number of questions about the impact of the accounting rule changes, such as how they will affect financial position, lending and securitisation, which types of entity would have to be consolidated, what features would be more likely to result in implicit support, and the interaction with government initiatives such as the loan modification programme and the 5% retention rule.
Meanwhile the American Securitization Forum has written to the Federal Deposit Insurance Corp asking the regulator to amend the Securitisation Rule, which sets out the conditions for legal isolation of securitised assets from the estate of the originator.
Because the securitisation rule requires that deals meet sale accounting criteria to achieve legal isolation, many market participants are worried that the new consolidation rules could threaten the bankruptcy remoteness of existing and future securitisations in the US. Once the new rules come into force, most securitisations would be accounted for as secured loans, thereby removing them from the securitisation rule’s safe harbour.
"The rule has been an essential part of the legal analysis performed by counsel to issuers providing legal opinions required by underwriters and rating agencies," said the ASF in its letter to FDIC special adviser Michael Krimminger.
"The continued ability to issue securities out of some structures and to obtain the ratings required for TALF-eligibility or otherwise for economically viable execution of securitisation transactions may be dependent upon the continued availability of the safe harbour benefits of the rule.
"In addition, outstanding securities issued in connection with securitisations that qualified for the protections offered by the rule prior to the adoption of the new accounting rules face the prospect of ratings downgrades if the rule is not modified, which could result in forced sales or other market disruption."
FDIC inserts "clawback" into latest deal
Source: FDIC clawback reflects US strategy shift Financial Times, August 18 2009
"US regulators are starting to structure bank rescue deals so as to limit the potential gains of buyers, a strategy shift that could deflect political criticism of the cost of bank bail-outs.
The Federal Deposit Insurance Corporation, the insurer of US bank deposits, sealed its first such “clawback” arrangement on Friday as part of its deal to sell $21.8bn of assets in Colonial, a bank seized by Alabama regulators, to BB&T.
As in past rescues, BB&T, based in North Carolina, bought the assets at a discount while the FDIC agreed to absorb the bulk of potential losses. In this case, the FDIC agreed to reimburse BB&T for 80 per cent of the first $5bn (£bn) in losses and 95 per cent of further losses up to a ceiling of $14.3bn.
But if losses from the Colonial assets are less than $5bn, BB&T also has agreed to pay some money to the FDIC – on October 15 2019 – in a new feature for bank rescues.
The FDIC confirmed it had “created a mechanism for capturing a portion of BB&T’s discount bid if realised losses are less than expected” and said the strat egy might be used again.
The FDIC’s deposit insurance fund fell to $13bn at March 31, its lowest in more than 15 years.
The FDIC is angling for a similar clawback provision as it seeks a buyer for Guaranty Financial, a struggling Texas bank with $14bn of assets, according to people close to the process.
One person who has evaluated banking assets said the regulator was “trying to do that on every deal now”.
Bids for Guaranty were due on Tuesday after a second postponement of the deadline.
Banks ranging from Toronto-Dominion and BBVA to Wells Fargo and New York Community Bank, as well as one private equity consortium, have considered making offers.
In the talks over Guaranty, the FDIC was considering whether to separate Guaranty’s worst assets from the rest of the business, said one person close to the matter.
The FDIC already bears much of the risk for failed banks’ bad assets, but the day-to-day management of those assets is usually handled by the party that buys the rest of each bank’s business. If bad assets were removed from à struggling bank, it is not clear how the FDIC would manage them unless they were quickly sold to another party.
The FDIC’s resources have grown constrained this year after 77 bank failures, and it has been criticised for agreeing to share in billions of dollars of potential losses on some bank rescues in order to lure willing buyers.
FDIC to toughen rules on banks’ securitizations
- Source: FDIC Seeks to Toughen Rules on Banks’ Securitizations Bloomberg, December 15, 2009
The Federal Deposit Insurance Corp. is proposing new rules on banks’ sales of securities backed by loans and leases, including limits on the pay of companies involved, after past practices helped create the worst financial crisis since the Great Depression.
The U.S. agency’s board voted to seek comment on possible conditions for bank securitizations at a meeting today in Washington. Banks would have to follow the guidance to win a so- called safe harbor that prevents the FDIC from seizing the assets bundled into their securitizations when it winds down failed institutions, making the bonds attractive to investors.
Policy makers are seeking to transform the almost $4 trillion U.S. market for securitizations not created by government-supported entities. Risky lending enabled by asset- backed bonds and investor losses on debt including subprime- mortgage securities led to a collapse in the world’s economies.
“We’re trying to strike a middle ground here” between those who want to eliminate securitization completely and those who want little to change, FDIC Chairman Sheila Bair said at the meeting. “I look forward to eventually finalizing strong, common-sense standards.”
The U.S. House last week passed a financial-overhaul bill that includes a requirement that loan originators and companies that package debt into securities retain 5 percent of the credit risk, among additional changes including ones related to disclosures. The Senate is considering similar modifications.
The FDIC’s board agreed to issue a so-called advance notice of proposed rulemaking, in which the agency will ask for comment on 35 questions and offer a version of what the securitization conditions might look like, according to an e-mailed copy of the planned notice.
It plans that approach rather than other options that could move more quickly toward final regulations because of interference from other regulators, said Joshua Rosner, an analyst in New York at investment research firm Graham Fisher & Co., said.
“The agency’s push to create smart, rational market- and investor-friendly standards seems to be running into opposition from other regulators who have repeatedly demonstrated their inability to separate what’s good for banks and issuers with what’s good for markets,” Rosner said in a telephone interview.
In its “sample” rule, the FDIC suggests, among other things, blocking for home-loan bonds any more than 80 percent of the compensation for lenders, securitization sponsors, credit raters and bond underwriters from being paid upfront, with the rest due over five years and based on asset performance.
It also proposes requiring sponsors to retain 5 percent of credit risk of all securitizations, as well as barring from securities any home loans less than a year old, or that don’t rely on documented borrower income.
Comptroller of the Currency John Dugan raised objections at the meeting to several ideas that he said might be part of rule changes. Those included: a ban on external support for issuances; the creation of the same disclosure requirements for private placements as public offerings; six-class limits for some securitizations; and the requirements for risk retention and the seasoning of mortgages ahead of securitizations.
Dugan and Office of Thrift Supervision Acting Director John Bowman, two of the five members of the FDIC’s board, said the agency may hurt banks competitiveness if it doesn’t act in tandem with other regulators such as the Securities & Exchange Commission and Federal Reserve, and may be best served waiting for lawmakers to finish deliberations.
“It would be far preferable to have rules that would apply across the board, as envisioned by the legislative proposals, than adopt a rule that applies only to insured depository institutions,” Dugan said.
The House legislation, approved 223-202, was weakened from a proposal to require as much as 10 percent risk retention, and allowed regulators to exempt commercial-mortgage bonds whose riskiest slices are bought by third parties doing due diligence.
The industry also is seeking to reform itself in some ways, with the American Securitization Forum today releasing guidelines for so-called representations and warranties on loans put into residential mortgage-backed securities. Such contract clauses can require lenders or issuers to repurchase debt that fails to match promises on its quality.
The New York-based trade group argued that the guidelines would help address the objectives of proposals that would require issuers or originators to retain slices of securitizations. The FDIC’s ideas include objectionable ones, the ASF said in a statement.
“A number of the proposals presented today may inadvertently slow the restart of the securitization markets at a time when American consumers and small- and medium-sized business most need the credit availability that these critical markets provide,” Tom Deutsch, deputy executive director of the securitization group, said in an e-mailed statement.
New accounting rules sparked concern among bond buyers and rating firms that the FDIC would be able to tap the pools of debt underlying credit-card securities to protect its deposit insurance fund after banks fail. That halted sales of such bonds in October and early November after issuance totaled $10.7 billion in September, according to data compiled by Bloomberg.
The rules from the Financial Accounting Standards Board took effect for fiscal years starting after Nov. 15, and require issuers to include assets and liabilities of securitized debt on their balance sheets in many circumstances. The FDIC last month agreed to grant safe harbors for bonds sold through March, unfreezing the market for credit-card securities, with Bair saying she wanted to seize on the opportunity to improve practices before granting a further extension.
Bair said today that the sample conditions that the FDIC is considering are consistent with lawmakers’ proposals, though the agency will consider suggested changes from regulators, consumer groups, lenders and others, with a particular focus on the thoughts of “the buy-side community” of debt investors.
The comment period will last for 45 days after the publication of the rulemaking notice in the Federal Register, which is expected in about two weeks, Greg Hernandez, an FDIC spokesman, said in an e-mail.
FDIC draws brisk bidding on loans
- Source: FDIC draws brisk bidding on loans by failed banks The Australian, December 23, 2009
INVESTORS are jostling for the chance to buy a $US1.1 billion ($1.25 billion) package of commercial real-estate loans extended by failed banks, as these once-toxic assets attract growing interest.
More than a dozen investors, including Texas banker Andrew Beal, have submitted bids to the Federal Deposit Insurance Corporation for the portfolio of loans held by Franklin Bank, IndyMac Bank and other failed lenders, according to people familiar with the matter.
But the portfolio represents only a fraction of the real-estate loans held by the FDIC and the volume is mounting as more banks fail.
The FDIC, which declined to comment on pending transactions, is expected to announce the winning bidder within weeks in what will be its second-largest bulk sale of commercial-property assets since the downturn.
The largest deal involved the sale in October of about $US5 billion in condominium loans and other property made by now-defunct Corus Bank.
Demand for these assets, at a discounted price, has grown intense. Investors have amassed billions of dollars to buy distressed loans and property much as investors like Sam Zell did in the early 1990s.
"A lot of investors are anxious to invest cash they have raised," said David Tobin, a principal with Mission Capital Advisors, a loan-sale adviser. But many banks won't sell.
Some, especially community and regional banks, haven't marked down the value of their existing loan portfolios to current market rates — something that could jeopardise the survival of weaker lenders.
Many hope the low cost of funds offered by historically low interest rates will let them earn their way out of trouble.
"They don't want to be blowing the entire mess out at the low point of the cycle," says John Howley, an executive director and specialist in loan sales at Cushman & Wakefield, a real-estate firm.
That makes the FDIC practically the only game in town. The agency has to sell off a growing pipeline of real-estate assets acquired from banks that collapsed after lending too aggressively to owners of offices, shopping malls, apartments and other commercial property.
Demand for its current package of loans is a consolation of sorts for the FDIC, which is trying to limit taxpayer losses and shore up its deposit-insurance fund.
An avalanche of bank failures wiped out the fund in the third quarter of this year, putting it at negative $US8.2 billion at the end of September.
While the loans are expected to be sold for a steep discount, experts say, the competition should drive the price higher.
Also, the FDIC is structuring the deal so taxpayers will share in the upside if the market improves.
Despite the strong interest from investors, the FDIC faces growing challenges to unload the assets. A total of 140 banks have gone belly up so far this year.
Currently, the FDIC has about $US30 billion in real-estate debt held by failed banks that is available for sale for the next 12 months, according to the agency. That figure is double the level a year ago.
In most FDIC deals involving failed banks during the current downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed.
But for some failed banks like Corus, Franklin and IndyMac, the FDIC has decided to sell some hard-to-value assets separately.
These bulk sales use a public-private partnership structure pioneered by the Resolution Trust Corporation, a federal agency formed to clean up the savings-and-loan mess in the early 1990s. The set-up enticed private investors to buy distressed real-estate assets while giving the government the opportunity to make money on behalf of taxpayers should the assets rise in value.
Since last year, the FDIC has sold residential and commercial loans through eight such partnerships, with the agency's equity interest ranging from 50 per cent to 80 per cent.
Those partnerships bought loans at discounts ranging from pennies on the dollar to more than US50c on the US dollar of face value. These structured deals, however, carry additional risk for the FDIC and, by extension, taxpayers.
Because the agency takes a big chunk of the equity and provides financing, it stands to lose more if the markets continue to decline.
Under the options being considered for the $US1.1 billion package, the FDIC would likely hold a 60 per cent stake and provide financing. Deutsche Bank is advising the FDIC on the auction. The portfolio consists of mostly non-performing commercial property loans.
Both Franklin, led by mortgage-bond pioneer Lewis Ranieri, and IndyMac were best known as home-mortgage lenders. But they also lent heavily to home builders and other property developers during the boom times, in states from California to Texas.
According to Foresight Analytics, Franklin had a total of $US1.6 billion in commercial real-estate loans as of the third quarter of 2008, before its closure last November, and IndyMac had about $US2.8 billion in such loans before its failure in July 2008.
Among the bidders for the portfolio is Mr Beal, whose Beal Bank laid low during the boom years and avoided much of the real-estate bust. It has since gone on an opportunistic buying and lending binge, increasing its assets to more than $US9 billion from $US2.9 billion in 2007.
"We're in the business of buying loans," said Mr Beal, a math whiz who likes to drive racing cars in his spare time. "There are good opportunities, but investors have to be careful of what they buy and what they pay for."
He said the bank's goal is to buy performing loans at discounts. If the borrower defaults, the bank may modify the terms to bring it back to current. The bank would make money as long as the borrower stays current on modified terms.
- Keehner Discusses FDIC Strategy for Failed Banks' Assets: Video Bloomberg, July 20, 2010
- `Vulture' Capitalists Buying Up FDIC's Busted-Bank Loans: Video Bloomberg, Apr. 14, 2010
FDIC details $1.8bn structured financing transaction
- Source: FDIC Details $1.8bn Structured Financing Transaction Credit Risk Chronicles, March 12, 2010
(Original posted on the Housing Wire by Diana Golobay)
The Federal Deposit Insurance Corp. (FDIC) today closed on a sale of notes backed by residential mortgage-backed securities (RMBS) from seven failed bank receiverships.
The news of the closing, summarized in an FDIC press release today, marks the first official release of information on $1.8bn of structured notes that roadshowed and priced in recent weeks. The FDIC also illustrated the structure of the transaction:
The sale was conducted through a private placement priced and allocated on March 5th. FDIC said it received “robust investor demand” in response to the transaction, with more than 70 investors — including banks, investment funds, insurance funds and pension funds — participating across fixed- and floating-rate series.
Barclays Capital served as the sole bookrunner, structuring agent and financial advisor on the platform, called Structured Sale of Guaranteed Notes (SSGN 2010-S1).
The timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the US government. This offering marks the first issuance of notes by the FDIC since the early 1990s and the first issuance of FDIC-guaranteed debt backed by the full faith and credit of the US.
The $1.81bn of notes is backed by 103 non-agency RMBS. The aggregate unpaid balance of the 103 securities was approximately $3.6 billion at the time of the sale. The FDIC retained an equity interest in each series.
The transaction features two series of senior notes, each backed by a separate pool of RMBS. The larger series of approximately $1.3bn is based on option adjustable-rate mortgages (ARMs) and has a floating rate tied to the one-month LIBOR. The smaller series of $480m is based mostly on fixed-rate RMBS and pays a fixed rate.
Both series priced at rates comparable to Ginnie Mae collateralized mortgage obligations. The issuance “significantly oversubscribed,” FDIC said, allowing the transaction to price at lower spreads to benchmark rates. The $1.33bn series priced at 55bps over Libor, 10bps tighter than earlier guidance. The class of $480m of notes priced at 85bps over Libor, 5-10bps tighter than guidance.
The $1.8bn in proceeds will go to the seven failed bank receiverships and eventually be used to pay creditors, including the FDIC’s Deposit Insurance Fund (DIF). FDIC said this should maximize recoveries for the receiverships and recover substantial funds for the DIF while also meeting strong investor demand.
- FDIC Prepares $653m in RMBS Notes from Failed Bank Credit Risk Chronicles, March 19, 2010
FDIC completes securitization of failed bank assets
- Source: FDIC Closes Pilot Securitization of Performing Single-Family Mortgages Aslton and Bird, July 30, 2010
Today, the FDIC announced the closing of a $471.3 million securitization of performing single-family mortgages from 16 failed banks. The FDIC stated that is the first time during the current financial crisis that the FDIC has sold assets in a securitization transaction.
The transaction consisted of three tranches of securities, including approximately $400 million senior certificates that represented 85% of the capital structure and were guaranteed by the FDIC. The senior certificates were offered and sold pursuant to 3(a)(2) of the Securities Act of 1933, which exempts from registration securities guaranteed by an instrumentality of the United States. The senior notes offered “sold at a coupon of 2.184 percent and [are] expected to have an average life of 3.66 years.” The subordinated certificates, which were retained by the failed bank receiverships, “comprised of a mezzanine and an over collateralization (OC) class representing 15 percent of the capital structure.”
The FDIC’s pilot program is generally in line with its proposed Securitization Safe Harbor Rule, with exception of “certain limited differences necessitated by the origin of the collateral and the absence of information available from the failed banks.” The FDIC has utilized several strategies to sell assets from failed banks including securitization, which is primarily one of the ways the FDIC intends to “maximize the value of these assets for the benefit of creditors of the failed banks.”
FDIC considers securitisation of failed bank assets
- The mother of all bank re-securitisations? FT Alphaville, February 11, 2010
- Source: US eyes bond issues to offload $36bn of troubled bank assets Financial Times, January 25, 2010
"The US Federal Deposit Insurance Corporation is working on plans to package billions of dollars of assets from failed banks into securities, a move that will help restart the still dysfunctional markets for mortgage-backed bonds.
If the FDIC goes through with the bond issues it would mark a milestone in government efforts to rid the banking system of troubled assets. The FDIC has more than $36bn (£22.4bn) in assets on its books from failed institutions seized during the financial crisis.
People involved in discussions said the plan to use the troubled assets to back securities - "securitisation" - is at a preliminary stage. A final decision, which could come in weeks, will depend on finding a structure to provide a sufficient return to the deposit insurance fund.
"The FDIC is going to be a big issuer in the securitisation markets this year," said Christopher Whalen, managing director of Institutional Risk Analytics. "This could lead the way in terms of recreating the securitisation market, as the FDIC deals could end up being the new template."
The FDIC plan is similar to a strategy used in the US savings and loan crisis by the Resolution Trust Corporation (RTC), the state-owned asset management company charged with liquidating assets from insolvent lenders in the 1980s. "The FDIC is dusting off the playbook of the RTC," said one person involved in the talks. The FDIC - created by the US government to guarantee deposits after a wave of bank failures during the Great Depression - declined to comment.
However, the regulator, under its chairman Sheila Bair, has been keen to expand its role in stabilising the US financial system. This has included pushing banks to adhere to stricter rules and underwriting standards when they use mortgages and other loans to back securities.
The market for such securitised assets was once a source of hundreds of billions of dollars a year of financing for banks and companies, but has been largely closed for private mortgage finance since investors lost billions of dollars on mortgagerelated debts in the crisis. The US mortgage market is mainly financed through US government-backed entities, such as Fannie Mae and Freddie Mac.
One option being considered by the FDIC is selling bonds with a US government guarantee in order to ensure they have triple A credit ratings.
- FDIC considers securitisation of failed bank assets Risk.net, November 9, 2009
"The Federal Deposit Insurance Corporation is considering securitising some of the failed bank assets in its receivership, according to a policy advisor at the agency.
“The FDIC is looking at all options to maximise the value of the assets in receiverships, and one of those options is securitising pools of loans,” says Michael Krimminger, a special advisor for policy at the agency, which insures bank deposits as well as managing receiverships.
The FDIC has assumed the assets of 120 banks that have failed this year, in comparison with 25 in 2008, and an average of four per year in the preceding decade. Most recently, five banks shut down for business on November 6, including United Commercial Bank (San Francisco), Prosperan Bank (Oakdale) and United Security Bank (Sparta).
The number of “problem banks” is also rising, reaching 416 at the end of the second quarter, up from 305 at the end of Q1. The combined assets of problem institutions total $299.8 billion, the highest level since the fourth quarter of 1993.
If the FDIC does decide to proceed with a securitisation programme, it will follow the same path as the Resolution Trust Corporation (RTC) in the 1990s. The RTC was a state-owned asset management company established in 1989 to liquidate the assets of thrifts that failed during the savings and loan crisis. Between 1989 and 1995, the RTC closed or resolved 747 thrifts with assets of $394 billion.
In addition to direct asset sales and the forming of joint ventures with private companies, the RTC actively used securitisation as a means to increase asset recovery values. Between June 1991, the month of its first deal, and December 1995, the RTC completed 72 securitisations backed by residential and commercial mortgages with a total value of $42 billion.
However, the most recent financial crisis has caused trillions of dollars’ worth of securitised assets to plummet in value, giving rise to widespread investor doubt about the viability of securitisation as an asset class.
Despite this, some analysts insist securitisation could be an effective tool in the FDIC’s efforts to resolve the assets of failed banks. The global head of securitised strategy at Citi, Darrell Wheeler, says: “The investors have been quite active in buying, and in today’s market where you have corporates that are rated single-B and are going for 8% or 9% yields, many of the consumer asset-backed securities are one of the last places investors can find a reasonably safe and good yield in return.”
Wheeler says the FDIC could successfully securitise “several billion dollars’ worth of assets”, including credit cards, consumer loans and student loans. “To the extent those markets are now open, those will be the most likely ones to come first. New appraisals on seasoned commercial mortgage portfolios would make them securitisable. And the same could probably be said for prime residential mortgages,” says Wheeler.
The president of commercial real estate finance and investment management firm CW Capital Asset Management, David Iannarone, who was involved in the RTC’s CMBS transactions, says investors are “definitely interested” in potential deals by the FDIC, and may not need any government-backed guarantees to put them at ease with the prospect. “I think they see the upside potential when the market begins to come back,” he says.
Not all investors are convinced, however.
“Securitisation tells you active management is not allowed,” says Ron D'Vari, chief executive officer at asset management firm New Oak Capital. “When you say securitisation, I don’t know if that means they’re going to put non-performing assets in a vehicle and hope that they will somehow through time secure themselves.
“Securitisation means passiveness. That’s what so far has been the meaning of securitisation, and that’s not good for the market, that’s not good for anybody.”
FDIC inherits about $400M of CDOs, more coming
- Source: Toxic CDOs Beset FDIC as Banks Fail Wall Street Journal, May 18, 2010
The FDIC has inherited hundreds of potentially worthless bonds that have come back to haunt the Wall Street firms that sold them, the credit-rating firms that graded them and the hundreds of small banks that bought them.
The Federal Deposit Insurance Corp., and by extension the U.S. taxpayer, owns more than 250 collateralized debt obligations that were purchased by small institutions that later failed. Although the bonds have a book value of more than $400 million, they are a headache for the agency as it grapples with the toxic assets flowing from many banks around the country.
"We're getting more of [the CDOs] all the time," said Miguel Browne, an assistant director in the FDIC's division of resolutions and receiverships. The agency has inherited such securities from about two dozen banks that have failed in the current crisis, including Omni National Bank in Atlanta, Venture Bank in Lacey, Wash., and San Diego National Bank.
The failure of Florida's Riverside National Bank has almost doubled the notional value of bonds held by FDIC.
The FDIC's mountain of bad securities has grown even bigger in recent weeks following the failure of Riverside National Bank of Florida, a small firm that had stuffed its investment portfolio with 27 CDOs known as trust preferred securities. Although it was a community bank with 58 branches in Florida, its pile of CDOs has almost doubled the notional value of bonds owned by the federal agency.
Now, in an unusual move, the FDIC may be preparing battle back directly. It has asked a New York court for permission to replace Riverside as plaintiff in a six-month-old lawsuit in which the bank accused more than a dozen financial firms of misrepresenting the value of the CDOs.
Buy-out firms face tougher capital conditions
- Source: Buy-out firms face tougher capital conditions Financial Times, August 26, 2009
"Private equity firms investing in US banks will have to hold higher-than-usual levels of capital under new rules approved on Wednesday by regulators who opted to scale back a tougher initial proposal following fierce criticism from prospective investors.
US regulators have traditionally discouraged purchases of banks by non-bank entities, but have moved away from that stance because of the need to raise fresh capital for troubled lenders during the financial crisis.
The Federal Deposit Insurance Corporation proposed rules in July that would have required banks bought by private equity firms to maintain a Tier One capital ratio - a measure of financial strength based on equity capital and reserves - of 15 per cent, or three times the usual standard.
On Wednesday, a divided FDIC board voted 4-1 to require private equity buyers of banks to maintain a Tier One capital ratio of only 10 per cent. The regulator also dropped a proposal that private equity buyers be a “source of strength” for banks they buy - meaning they might have to provide additional support.
Regulators tussled over the details until the last minute, reflecting deep divisions over the rules, which can be reviewed again in six months.
Sheila Bair, FDIC chairman, said the agency’s staff had made ”significant” changes to the July proposal following comments from industry members and academics. ‘’I regret that we could not reach unanimity,’’ she said. ‘’This is a really tough issue.’’
John Bowman, acting director of the Office of Thrift Supervision, was the sole dissenter. He called the proposal ‘’overly broad and imprecise’’, while adding that he was “not a fan of, or a proponent of, private equity.’’
John Dugan, comptroller of the currency, who opposed the initial proposal, called the rules approved on Wednesday “considerably improved.” He added: ‘’It is, however, a compromise that does not have everything I would have wanted. I also worry that a 10 per cent capital requirement, while it may be too low in some circumstances, may be too high in others.’’
Eighty-one US banks have failed so far this year, and regulators are fanning out aggressively in search of buyers for distressed assets. The FDIC has indicated that it prefers other banks as buyers, but the roster of financial institutions willing to buy bad assets is thinning.
The rules governing private equity investments in banks reflect continuing concerns among regulators about having buyout firms own banks."
- Source: FDIC to Relax Bank Auction Proposals UPI, August 21, 2009
"Regulators in Washington are fiddling with proposals to make it easier for private equity firms to buy failed banks, sources close to the discussions said.
Federal Deposit Insurance Corp. officials are working through changes in proposals submitted in July in advance of a board meeting Wednesday, The Wall Street Journal reported.
Changes to the proposals could include smaller mandates for capital cushions and relaxing requirements that would have put equity firms in a position of supporting bank subsidiaries, the Journal said Thursday.
The point is to make it encourage bidding on failed banks taken over by the FDIC. Seventy-seven U.S. banks have failed so far this year, up from 25 in all of 2008. But bidding at some recent bank auctions has been flat, the Journal said.
A proposed mandate for buyout firms to keep bank charters for three years is expected to remain intact. The proposal seeks to prevent firms from turning over the banks quickly for a fast profit."
- Source: FDIC Final Policy Statement Onerous and Unclear The Harvard Law School Forum on Corporate Governance and Financial Regulation, Davis Polk & Wardwell LLP, September 8, 2009
"At a meeting of the Board of Directors of the FDIC on August 26, 2009, the FDIC adopted a Final Statement of Policy on Qualifications for Failed Bank Acquisitions.
The final policy statement establishes standards and requirements for private investors acquiring or investing in failed insured depository institutions, including through holding companies formed for that purpose. While the final policy statement is a substantial improvement over the proposed policy statement issued on July 2, 2009, it nevertheless subjects private investors to more onerous requirements than those applicable to existing banks, thrifts and their respective holding companies, which explicitly remain the FDIC’s preferred buyers of failed insured depository institutions. Just how onerous these requirements will be is unclear, as the final policy statement leaves a number of terms and concepts undefined and thus subject to the discretionary interpretation of the FDIC. The FDIC Board of Directors has not only reserved the right to modify the policy statement in specific situations, but also agreed to revisit the policy statement in six months.
Scope. The policy statement will not apply to private investors with 5% or less of total voting power; nor will it apply to pre-existing investments in failed depository institutions.
Term. Upon application to the FDIC, investors may seek relief from the policy statement if the institution invested in has maintained a composite CAMELS rating of 1 or 2 continuously for seven years.
Capital. The FDIC backed off its proposed 15% Tier 1 leverage requirement, but instead imposed a minimum 10% ratio of Tier 1 common equity to total assets. While the 10% requirement probably will not eliminate private capital bids for failed banks, at least in the near term, it represents a financial penalty that will reduce any potential bid, thus hindering private investors.
Cross Guarantee. The FDIC backed off its initial proposal to impose cross-guarantee liability where there is majority common ownership, increasing the common ownership threshold to 80% and clarifying the intent to impose that liability on common owners directly. While the 80% test is a significant improvement, it still represents a deterrent for prospective private investors.
Source of Strength. The FDIC completely eliminated the proposed source of strength requirement, but underlined the source of strength obligations of a depository institution’s holding company by deeming an insured depository institution “undercapitalized” for purposes of prompt corrective action if its Tier 1 common equity ratio drops below 10%.
Transactions with Affiliates. The final policy statement goes well beyond Section 23A of the Federal Reserve Act by flatly prohibiting transactions with private investors, their investment funds and any of their respective affiliates and by defining affiliates by reference to a 10% level of ownership.
Bank Secrecy Jurisdictions. The FDIC retained the ability to refuse to allow investors from so-called bank secrecy jurisdictions to participate.
Holding Period. The FDIC retained the minimum three-year ownership requirement, although it will permit transfers to affiliates that agree to the provisions of the policy statement, subject to FDIC consent, and it excluded mutual funds from this minimum holding period requirement.
Prohibited Structures. The FDIC retained the ability to preclude ownership structures that the FDIC determines to be “complex and functionally opaque.”
Precluded Investors. The policy statement retains a prohibition on investors that hold 10% or more of the equity of an institution in receivership from bidding on that institution.
Disclosures. Investors subject to the policy statement are required to provide substantial information to the FDIC in connection with any proposed bid.
Despite the compromises reflected in the final policy statement, the FDIC Board was unable to achieve unanimity, with the final policy statement being approved by a 4-1 vote. John Bowman, Acting Director of the Office of Thrift Supervision, cast the opposing vote, stating that the lack of empirical data supporting the policy statement made it impossible to evaluate its benefits."
- Source: FDIC Raises Barriers for New Entrants to Banking Industry K&L Gates, September 29, 2009
GAAP can be disregarded for capital purposes
Source: Will Bank Regulators Diverge from GAAP? CFO.com August 20, 2009
"Bank regulators are set to discuss accounting standards next week, with an aim toward determining the potential affects that off-balance-sheet rules may have on some financial institutions. During the past year, bankers have fretted about new accounting rules that would force them to bring back on their balance sheets billions of dollars worth of assets — a move bankers have argued will throw regulatory capital ratios into chaos.
As a result, the Federal Deposit Insurance Corp., the federal agency that insures bank deposits, announced it would discuss "the impact of modifications to generally accepted accounting principles" during its August 26 board meeting. What that likely means is board members will debate the practical implications of the rules known as FAS 166 and FAS 167, which beginning in January 2010 will change the way banks and other financial institutions account for securitizations and special-purpose entities (SPEs)...
...The impact of the accounting rules on banks came to a head in May, when the Federal Reserve Board released the results of its so-called stress tests, which were performed on the 19 largest bank holding companies in the United States. The unprecedented stress testing, officially dubbed the Supervisory Capital Assessment Program, incorporated several accounting changes into its modeling, including the potential effects of FAS 166 and FAS 167. In its summary report, the Fed concluded that the new FASB rules would require banks to reconsolidate off-balance-sheet assets tied to securitizations and SPEs.
So far, the estimates of how many billions of dollars would have to be reconsolidated vary, with the Fed guessing that an aggregate $700 billion worth of assets would be brought back on the balance sheets of the largest bank holding companies. News reports have estimated the impact to be closer to $1 trillion worth of assets.
The problem for banks is that as they consolidate the assets, they also will be required by law to increase their capital cushion, something that could prove undoable during a credit crisis.
Banks do have reason to hope, however. While banking regulators usually require GAAP-based reporting from financial institutions, which would include the use of FAS 166 and FAS 167, they can ignore GAAP for regulatory capital purposes. Indeed, that is exactly what happened when banks protested an earlier effort to improve securitization accounting. In 2005, to help quell a bank backlash against FASB's FIN 46, the Fed announced that accounting rules need not apply to banks.
"Although [generally accepted accounting principles inform] the definition of regulatory capital, the Board is not bound to use GAAP accounting concepts in its definition of tier 1 or tier 2 because regulatory capital requirements are regulatory constructs designed to ensure the safety and soundness of banking organizations, not accounting designations established to ensure the transparency of financial statements," said the Fed. "In this regard, the definition of tier 1 capital since the Board adopted its risk-based capital rule in 1989 has differed from GAAP equity in a number of ways."
Loan requirements for commercial real estate not enforced
- Source: Why would anyone believe bank earnings yet? Joseph R. Mason, RGE Monitor, October 20, 2009
"With regard to financial uncertainty, commercial real estate is still bleeding and the reasons it is doing so are only now becoming apparent. As more people are reading the Treasury Office of Inspector General Material Loss Reviews, the growing realization is that the sector underwent its own bubble in the consumer run-up. According to Bloomberg yesterday, the Federal Deposit Insurance Corp. failed to enforce its own guidelines to rein in excessive commercial real estate lending by limiting commercial real estate loans to 300 percent of capital at more than 20 banks that later collapsed.
“The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed.” (Alison Vekshin, “FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show,” Oct 19, 2009)
Those losses are still bouncing around in bank balance sheets and the economy, overall, as more foreclosed commercial real estate collateral litters the market. Moreover, as commercial real estate occupants learn to economize, the market is inextricably changing. For instance, as retailers adopt “just in time” footprints, renting temporary shop space for holiday sales, the retail landscape can expect to be forever changed following the crisis so that the overhang of retail space will take a long time to burn off.
Material Loss Reviews
- Source: Material Loss Review of Riverside Bank of the Gulf Coast Board of Governors of the Federal Reserve System, Office of Inspector General, September, 2009
The Honorable Daniel K. Tarullo Chairman Committee on Supervisory and Regulatory Affairs Board of Governors of the Federal Reserve System Washington, DC 20551
Dear Governor Tarullo:
Consistent with the requirements of section 38(k) of the Federal Deposit Insurance Act (FDI Act), as amended, 12 U.S.C. 1831o(k), the Office of Inspector General of the Board of Governors of the Federal Reserve System conducted a material loss review of Riverside Bank of the Gulf Coast. The FDI Act requires that the Inspector General of the appropriate federal banking agency review the agency’s supervision of a failed institution when the loss to the Deposit Insurance Fund (DIF) exceeds the greater of $25 million or 2 percent of the institution’s total assets. The FDI Act specifically requires that we
- ascertain why the institution's problems resulted in a loss to the DIF;
- review the institution’s supervision, including the agency’s implementation of Prompt Corrective Action; and
- make recommendations for preventing any such loss in the future.
Riverside Bank of the Gulf Coast (Riverside-Gulf Coast) was supervised by the Federal Reserve Bank of Atlanta (FRB Atlanta), under delegated authority from the Board of Governors of the Federal Reserve System (Board), and by the Florida Office of Financial Regulation (State). The State closed Riverside-Gulf Coast on February 13, 2009, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. On March 9, 2009, the FDIC Inspector General notified us that, according to the FDIC, the failure of Riverside-Gulf Coast would result in an estimated loss to the DIF of $201.5 million, or 37.5 percent of the bank’s $536.7 million in total assets.
Riverside-Gulf Coast failed because the bank did not adequately control the risks resulting from its (1) growth strategy to establish a residential real estate loan portfolio and (2) reliance on selling mortgages in the secondary market. The aggressive growth resulted in a commercial real estate (CRE) concentration in the bank’s local service area that included a sizable number of residential construction loans to speculative investors.
By 2007, the economic downturn caused credit tightening in the secondary markets, thereby hampering, and eventually eliminating, Riverside-Gulf Coast’s ability to sell mortgages. In addition, the unprecedented drop in southwest Florida’s real estate market decreased the underlying collateral value of the bank’s real estate loan portfolio. These factors required Riverside-Gulf Coast to increase its allowance for loan losses, which negatively impacted earnings, resulting in insufficient capital to absorb losses, ultimately leading to the bank’s insolvency.
With respect to supervision, FRB Atlanta complied with the frequency of safety and soundness examinations prescribed in regulatory guidance, and conducted off-site monitoring commensurate with concerns and risks identified during examinations. During a three-and-a-halfyear period beginning in June 2005, FRB Atlanta performed on-site examination related work at Riverside-Gulf Coast on seven separate occasions. Examiners began focusing greater supervisory attention on the bank’s high CRE concentration and speculative lending in 2005 and required Riverside-Gulf Coast to mitigate associated risks when the real estate market was robust and the bank’s overall condition and asset quality were sound. Despite FRB Atlanta’s supervisory efforts, the combination of an unusually rapid and severe real estate market downturn and the unexpected disappearance of the secondary market led to Riverside-Gulf Coast’s failure.
Fulfilling our mandate under section 38(k) provides an opportunity to determine whether, in hindsight, the circumstances surrounding a bank’s failure warranted additional or alternative supervisory actions. Based on our analysis of Riverside-Gulf Coast’s supervision, we believe that emerging problems observed during a 2007 visitation provided FRB Atlanta with an opportunity for a more aggressive supervisory response. Specifically, FRB Atlanta noted a significant decline in the local residential housing market and observed that new appraisals indicated that the value of certain collateral, particularly developed lots ready for construction, declined by as much as 70 percent. In addition, examiners observed that Riverside-Gulf Coast could no longer sell mortgages in the secondary market and, therefore, would be required to hold and service these loans. According to examiners, classified assets were expected to increase in the near term, and earnings would be affected by an expected increase in the bank’s loan loss reserves.
In our opinion, the circumstances that FRB Atlanta highlighted in the 2007 visitation signaled a sudden and total transformation of Riverside-Gulf Coast’s longstanding business model and warranted more immediate supervisory attention, such as (1) conducting an asset quality target examination, (2) requiring the bank to prepare a new capital plan, or (3) further accelerating the full-scope examination that was conducted in March 2008. However, in light of the rapid deterioration in Riverside-Gulf Coast’s local real estate market, it is not possible to determine the degree to which such an action would have affected the bank’s subsequent decline or the failure’s cost to the DIF.
In assessing Riverside-Gulf Coast’s failure, we have also noted that the loss of the secondary market was a significant factor because the bank was suddenly forced to begin holding loans in a rapidly deteriorating market. As property values fell, speculative investors involved in ongoing residential real estate construction projects, as well as other more traditional mortgage borrowers, ceased making loan payments. Riverside-Gulf Coast’s efforts to reduce losses by restructuring debts held in the bank’s portfolio met with limited success because the modified loans were downgraded to classified assets after examiners determined that the loans were impaired.
Temporary Liquidity Guarantee Program update
- Source: Temporary Liquidity Guarantee Program FDIC website
The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.
- Monthly Reports on Debt Issuance under the TLGP – through January 31, 2010
Final Rule The final rule for the program was approved by the FDIC Board of Directors on November 21, 2008.
- Final Rule regarding the Temporary Liquidity Guarantee Program
- Frequently Asked Questions – As of November 16, 2009
Deposit insurance core principles
- Source: Deposit insurance core principles Keynote address by Mr Jaime Caruana, General Manager of the BIS, at the Conference on the "Core Principles for Effective Deposit Insurance Systems", Basel, 23-24 September 2009.
"...Of course, a key lesson of interest for all of us today relates to deposit insurance. The crisis has shown that deposit insurance issues matter a lot for financial stability. It is essential to have properly functioning deposit insurance schemes in place when financial stress emerges. This can help support confidence, limit panic reactions, and avoid economic agents becoming too risk-averse. And it is essential that these robust insurance frameworks are built sufficiently in advance in good times, given that it is often too late to improvise once the problems occur. Indeed, the recent crisis has required exceptional measures beyond the comfort zone of all policymakers. Many countries around the world had to expand deposit insurance coverage across the board in a precipitous and uncoordinated way. This highlighted the importance of international cooperation in a global crisis.
From this perspective, the recent completion of deposit insurance core principles is welcome and represents a great achievement on the part of IADI. It is testament to the fact that the official sector can collectively deliver high-quality, well considered and highly relevant work. It is also a good example of cooperation among standard setters, namely IADI and the Basel Committee on Banking Supervision.
The design of explicit and internationally coordinated deposit guarantees will instil public confidence. Having proper mechanisms in place in a pre-emptive way should a new episode of financial stress emerge will provide clarity and certainty. The new principles will also contribute to financial stability by minimising systemic risk, protecting consumers, limiting moral hazard and promoting market efficiency. This in turn will help to limit the severity and probability of future crises.
It will also contribute to addressing the new challenges posed by the crisis in this area of deposit insurance, for instance: the strategies for exiting from government explicit and implicit guarantees; and the "too big to fail" problem and the necessary resolution frameworks, particularly for cross-border bank resolution. In particular, the recent turmoil in Iceland has underlined the importance of cross-border coverage of deposit insurance. Indeed, the recent report prepared by the Cross-border Bank Resolution Group of the Basel Committee sets out 10 key recommendations that reflect the lessons from the recent financial crisis and seek to improve the resolution of a failing financial institution that has cross-border activities. In this context, having adequate special resolution regimes in place to deal with failing financial institutions will ensure the prompt payment of insured cross-border deposits. They can help to reduce the moral hazard problem.
The various standard setters such as IADI and the Basel Committee as well as the BIS - in particular through its Financial Stability Institute (FSI) - are continuing to work on many other issues related to deposit insurance. Some of these efforts seek to improve firm-specific risk management inadequacies, supervisory standards and oversight. Other important tasks are more macroprudential: for example, the accurate assessment of the interlinkages between the performance of systemically important banks, financial stability and the real economy; or the introduction of countercyclical elements in prudential regulation. I will not be reviewing these specific issues in detail today. But it is essential that this ongoing work is continued apace and with the full support of the international community."
Deposit Insurance Fund
In February, 2006, President George W. Bush signed into law the Federal Deposit Insurance Reform Act of 2005 ("FDIRA") and a related conforming amendments act. The FDIRA contains technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements. Among the highlights of this law was merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change was made effective March 31, 2006. The FDIC maintains the DIF by assessing depository institutions an insurance premium.
The amount each institution is assessed is based both on the balance of insured deposit deposits as well as on the degree of risk the institution poses to the insurance fund.
Source: FDIC’s Deposit Fund May Need 25% of U.S. Banking Profit in 2010 American Banking News, August 23, 2009
"With the 80th bank failure occurring in just the first eight months of 2009, the U.S. banking industry’s fee burden from the FDIC is continuing to be pressured as the Deposit Insurance Fund shrinks. Richard Bove, an analyst with Rochdale Securities, told Reuters in a report that the FDIC’s Insurance Fund may need to collect an amount that would equate to about 25 percent of U.S. bank industry pretax income in 2010 to stay afloat.
In the report Bove predicted another 150 to 200 additional U.S. banks failures before the current banking crisis ends. The FDIC will likely use special assessments against banks in order to raise the extra funds needed to secure the Deposit Insurance Fund’s integrity. Bove believes special assessments in 2010 could reach $11 billion in addition to the regular fees banks already pay.
The FDIC last levied a special assessment in the second quarter of five basis points on each FDIC-insured bank’s assets. The assessment is scheduled for collection on September 30.
When the FDIC released its final statement detailed the second quarter assessment it projected that the Deposit Insurance Fund would remain low, but positive through 2009 and begin to rise in 2010. However, FDIC Chairman Blair Sheila Blair said in that same statement an additional assessment may be required as early as the fourth quarter of 2009.
The Deposit Insurance Fund ended the first quarter of the year with a balance of roughly $13 billion. Since that time the FDIC has had to digest several large bank failures, such as Colonial BancGroup, which cost the fund about $4 billion.
The Deposit Insurance Fund holds a fraction of the $52 billion it had just a year ago, raising the odds of an upcoming special assessment to near certainty."
- FDIC Holds Forum for Discussion of Views on the Implementation of the New Deposit Insurance Assessment Authority Alton & Bird, September 26, 2010
Exposure to insured deposits & DIF reserve ratios
A March 2008 memorandum to the FDIC Board of Directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.
As of June 2008, the DIF had a balance of $45.2 billion.
Bank failures typically represent a cost to the DIF because FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while at the same time making good on the institution's deposit obligations.
In July 2008, IndyMac Bank failed and was placed into receivership. The failure was initially projected by the FDIC to cost the DIF between $4 billion and $8 billion but shortly thereafter the FDIC revised its estimate upward to $8.9 billion.
Due to the failures of IndyMac and other banks, the DIF fell in the second quarter of 2008 to $45.2 billion.
The decline in the insurance fund's balance caused the reserve ratio (fund's balance divided by the insured deposits) to fall to 1.01 percent as at 30 June 2008, down from 1.19 percent in the prior quarter. Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.
"Full Faith and Credit"
In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC's power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), "FDIC deposit insurance is backed by the full faith and credit of the United States government". This means that the resources of the United States government stand behind FDIC-insured depositors."
The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding resolution to this effect  but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
Transaction Account Guarantee (TAG) Program
Source: FDIC Adopts Final Rule Extending Transaction Account Guaranty Program Alston and Bird, August 27, 2009
"Yesterday, the FDIC issued a final rule providing for the limited extension until June 30, 2010 of the Transaction Account Guarantee (TAG) Program (a component of the FDIC’s Temporary Liquidity Guarantee Program, originally set to expire December 31, 2009), and a modified fee structure. The FDIC adopted Alternative B (with slight modification), one of two alternatives proposed in its June 23 Notice of Proposed Rule Making. Alternative A would have preserved the December 31, 2009 expiration date of the TAG Program.
In addition to extending the TAG program through the first half of 2010, the final rule
- (i) increases the annualized assessment fee that applies during that six-month period from 10 basis points to either 15 basis points, 20 basis points, or 25 basis points depending on the institution’s Risk Category, and
- (ii) provides a one-time, irrevocable opportunity for currently participating entities to opt out of the TAG program effective on January 1, 2010.
In order to opt-out, a participating entity must submit an email to the FDIC no later than November 2, 2009 that meets all of the requirements of 12 CFR 370.5(g)(2).
Although the FDIC received several comments explicitly supporting Alternative A under the "generally shared" opinion that financial market volatility and risk aversion "have moderated since the FDIC implemented the TAG program in the fall of 2008," the FDIC "believes that the better alternative" was to extend the TAG Program given that most commenters that supported Alternative B "generally expressed a belief that, despite vast improvement since the fall of 2008, the economy has not yet stabilized to the point that depositors would be comfortable having large uninsured or non-guaranteed transaction balances on deposit with smaller insured depository institutions or community banks."
Likewise, FDIC staff advocated  for the FDIC Board to adopt the final rule, given that "there are still significant portions of the banking industry, particularly in regions still suffering the most from recent economic turmoil, that may need the benefits of the TAG program beyond the end of the year."
Currently, over 7,100 insured depository institutions participate in the TAG program, and the FDIC has "guaranteed an estimated $700 billion of deposits in noninterest-bearing transaction accounts that would not otherwise be insured."
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
- Well capitalized: 10% or higher
- Adequately capitalized: 8% or higher
- Undercapitalized: less than 8%
- Significantly undercapitalized: less than 6%
- Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
Resolution of insolvent banks
The two most common methods employed by FDIC in cases of insolvency or illiquidity are:
- Purchase and Assumption Method (P&A), in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets). Other failed assets are auctioned online, primarily through The Debt Exchange and First Financial Network.
There are several types of P&As:
- The Basic P&A: assets that pass to acquirers generally are limited to cash and cash equivalents.
- The Loan Purchase P&A: the winning bidder assumes a small portion of the loan portfolio, sometimes only the installment loans, in addition to the cash and cash equivalents.
- The Modified P&As: the winning bidder purchases the cash and cash equivalents, the installment loans, and all or a portion of the mortgage loan portfolio.
- The P&As with Put Options: to induce an acquirer to purchase additional assets, the FDIC offered a “put” option on certain assets that were transferred.
- The Whole Bank P&As: Bidders were asked to bid on all assets of the failed institution on an “as is,” discounted basis (with no guarantees). This type of sale was beneficial to the FDIC for three reasons. First, loan customers continued to be served locally by the acquiring institution. Second, the whole bank P&A minimized the one-time FDIC cash outlay, and the FDIC had no further financial obligation to the acquirer. Finally, a whole bank transaction reduced the amount of assets held by the FDIC for liquidation.
- The Loss Sharing P&As: these use the basic P&A structure except for the provision regarding transferred assets. Instead of selling some or all of the assets to the acquirer at a discounted price, the FDIC agrees to share in future loss experienced by the acquirer on a fixed pool of assets.
- Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank. These are straight deposit payoffs and are only executed if the FDIC doesn’t receive a bid for a P&A transaction or for an insured deposit transfer transaction. In a straight deposit payoff, no liabilities are assumed and no assets are purchased by another institution. Also, the FDIC determines the insured amount for each depositor and pays that amount to him or her. In calculating each customer’s total deposit amount, the FDIC includes all the interest accrued up to the date of failure under the contractual terms of the depositor’s account.
FDIC deposit insurance covers deposit accounts, which, by the FDIC definition, include:
- demand deposit accounts (checking accounts), and negotiable order of withdrawal accounts (NOW accounts, i.e., savings accounts that have check-writing privileges)
- savings deposit accounts (savings accounts), and money market deposit accounts, (MMDAs, i.e., higher-interest savings accounts subject to check-writing restrictions)
- time deposit accounts including certificates of deposit (CDs)
- outstanding cashier's checks, interest checks, and other negotiable instruments drawn on the accounts of the bank.
Accounts at different banks are insured separately. All branches of a bank are considered to form a single bank. Also, an Internet bank that is part of a brick and mortar bank is not considered to be a separate bank, even if the name differs.
Items not insured by FDIC
Only the above types of accounts are insured. Some types of uninsured products, even if purchased through a covered financial institution, are:
- Stocks, bonds, mutual funds, and money funds
- The Securities Investor Protection Corporation, a separate institution chartered by Congress, provides protection against the loss of many types of such securities in the event of a brokerage failure, but not against losses on the investments.
- Further, as of September 19, 2008, the US Treasury is offering an optional insurance program for money market funds, which guarantees the value of the assets.
- Investments backed by the U.S. government, such as US Treasury securities
- The contents of safe deposit boxes.
- Even though the word deposit appears in the name, under federal law a safe deposit box is not a deposit account – it's a well-secured storage space rented by an institution to a customer.
- Losses due to theft or fraud at the institution.
- These situations are often covered by special insurance policies that banking institutions buy from private insurance companies.
- Accounting errors.
- In these situations, there may be remedies for consumers under state contract law, the Uniform Commercial Code, and some federal regulations, depending on the type of transaction.
- Insurance and annuity products, such as life, auto and homeowner's insurance.
National Financial sweeps broker cash to FDIC banks
- Source: National Financial Helps Broker/Dealers Provide FDIC Insurance Wall Street and Tech, October 13, 2009
"National Financial announced today a new program that enables retail broker/dealers to deposit or "sweep" cash in their customers' eligible brokerage accounts into multiple interest-bearing bank accounts that offer FDIC insurance coverage. The National Financial Bank Deposit Sweep Program offers broker/dealers the ability to allocate their customers' brokerage cash across as many as eight program banks.
Within the new offering, principal and accrued interest will be eligible for FDIC insurance up to the current $250,000 per bank, or combined coverage of up to nearly $2 million when deposits are spread across multiple banks in the network. For example, an investor deposits $600,000 into his or her brokerage account and then selects three program banks within the "sweep" program. The following business day, $246,500 is deposited in the first program bank, $246,500 is deposited in a second program bank, and the remaining $107,000 is deposited into a third program bank, providing the customer FDIC coverage for the entire $600,000.
"Given the volatility of the markets over the past year, investors have historically high levels of cash and may be looking to protect their principal as they evaluate long-term investment opportunities," said Bob Leonhardt, senior vice president, National Financial. "Our new program can help firms meet their customers' funding and liquidity needs by providing them with an FDIC-insured option within their brokerage account that offers coverage of up to nearly $2 million."
History of the FDIC
The 19th century economy of the United States was characterized by occasional bank panics, with corresponding economic downturns and unemployment. After the particularly severe Panic of 1893, legislators sought to arrange better security for bank deposits. William Jennings Bryan, for example, proposed a national bank guarantee fund for use during bank runs. Although deposit security measures were adopted over time at the state level, the federal government chose a "lender of last resort" approach in the 1913 foundation of the Federal Reserve system.
This combined state-federal system failed to prevent a bank panic in 1933, at the end of Herbert Hoover's term as president. The panic saw 4,004 banks closed, with an average of $900,000 in deposits. Under the federal government's supervision, these banks were merged into stronger banks. Many months later, depositors received compensation for roughly 85% of their former deposits.
Incoming President Franklin D. Roosevelt, a former banker himself, did not like the insurance approach, but he agreed to it to restore confidence in the banking system. 
In May 1933, the U.S. House Banking and Currency Committee submitted a bill that would insure deposits 100 percent to $5,000, and after that on a sliding scale; it would be financed by a small assessment on the banks. However the U.S. Senate Banking Committee reported a bill that excluded banks that were not members of the Federal Reserve System.
Senator Arthur Vandenberg rejected both bills because neither contained a ceiling on the guarantees. He proposed an amendment covering all banks, beginning by using a temporary fund and a $2,500 ceiling. It was passed as the Glass Steagall Deposit Insurance Act in June 1933 with Steagall's amendment that the program would be managed by the new Federal Deposit Insurance Corporation. The act established the FDIC as a temporary government corporation and gave the FDIC the authority to regulate and supervise state non-member banks; it extended federal oversight to all commercial banks for the first time, and prohibited banks from paying interest on checking accounts. The act funded the FDIC with $289 million in initial loans from the United States Treasury and the Federal Reserve, loans which the FDIC repaid in 1948.
The bill was not supported by banks: Francis Sisson, then-president of the American Bankers Association, said that concept of banks paying into a fund that would insure individual banks against losses was "unsound, unscientific, unjust, and dangerous."
Led by Chicago banker Walter J. Cummings, Sr., the FDIC soon included almost all the country's 19,000 banking offices. Insurance started January 1, 1934. President Franklin D. Roosevelt was personally opposed to insurance because he thought it would protect irresponsible bankers, but yielded when he saw Congressional support was overwhelming.
In early 1934, Roosevelt appointed Leo Crowley, a Wisconsin banker, as the second head of FDIC. Crowley, Roosevelt soon learned, did not have an unblemished record as a banker in Wisconsin. After some anguish, Roosevelt kept Crowley on and ignored his detractors. The outstanding public service of Leo Crowley was not generally known until 1996. (Stuart L. Weiss; The President's Man: Leo Crowley and Franklin Roosevelt in Peace and War;; Southern Illinois University Press, 1996)
The Banking Act of 1935 established the FDIC as a permanent agency of the government and provided for deposit insurance up to $5,000.
The Federal Deposit Insurance Act of 1950 increased the insurance limit to $10,000, gave the FDIC the authority to lend to any insured bank in danger of closing if the operation of the bank is essential to the local community, and authorized the FDIC to examine national and state member banks for their insurance risk.
A deposit insurance limit of $100,000 was enacted in 1980 by the Depository Institutions Deregulation and Monetary Control Act of 1980.
Historical insurance limits
- 1935 - $5,000
- 1950 - $10,000
- 1966 - $15,000
- 1969 - $20,000
- 1974 - $40,000
- 1980 - $100,000
- 2008 - $250,000 (Temporary increase due to expire December 31, 2013)
S&L and bank crisis of the 1980s
Federal deposit insurance received its first large-scale test in the late 1980s and early 1990s during the savings and loan crisis (which also affected commercial banks and savings banks).
The brunt of the crisis fell upon a parallel institution, the Federal Savings and Loan Insurance Corporation (FSLIC), created to insure savings and loan institutions (S&Ls, also called thrifts). Due to a confluence of events, much of the S&L industry was insolvent, and many large banks were in trouble as well. The FSLIC became insolvent and merged into the FDIC. Thrifts are now overseen by the Office of Thrift Supervision, an agency that works closely with the FDIC and the Comptroller of the Currency. (Credit unions are insured by the National Credit Union Administration.) The primary legislative responses to the crisis were the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
This crisis cost taxpayers an estimated $150 billion to resolve.
2008/2009 Financial Crisis
As a result of the current economic and financial crisis, over 30 U.S. banks have become insolvent and have been taken over by the FDIC since 2008. Combined, these banks held over $55 billion in deposits, and the takeovers cost the federal government an estimated $17 billion.
There were two separate FDIC funds; one was the Bank Insurance Fund (BIF), and the other was the Savings Association Insurance Fund (SAIF). The latter was established after the savings & loans crisis of the 1980s. The existence of two separate funds for the same purpose led to banks attempting to shift from one fund to another, depending on the benefits each could provide. In the 1990s, SAIF premiums were at one point five times higher than BIF premiums; several banks attempted to qualify for the BIF, with some merging with institutions qualified for the BIF to avoid the higher premiums of the SAIF. This drove up the BIF premiums as well, resulting in a situation where both funds were charging higher premiums than necessary. (Sicilia, David B. & Cruikshank, Jeffrey L. (2000). The Greenspan Effect, pp. 96–97. New York: McGraw-Hill. ISBN 0-07-134919-7.)
Then Chairman of the Federal Reserve Alan Greenspan was a critic of the system, saying that "We are, in effect, attempting to use government to enforce two different prices for the same item namely, government-mandated deposit insurance. Such price differences only create efforts by market participants to arbitrage the difference."
Greenspan proposed "to end this game and merge SAIF and BIF".(Sicilia & Cruikshank, pp. 97–98.)
- Federal Deposit Insurance Corporation
- FDIC Statistics at a Glance
- FDIC list of Failed Banks
- Monthly List of Banks Examined for CRA Compliance
- FDIC Quarterly
- Final Model Privacy Form under the Gramm-Leach-Bliley Act US Government
- The Federal Deposit Insurance Reform Conforming Amendments Act of 2005
- History including Boards of Directors
- FDIC May Seek $1 Billion in Damages From More than 50 U.S. Bank Executives Bloomberg, October 8, 2010
- Tighter Lending Rules Needed: FDIC's Bair CNBC.com, September 9, 2010
- FDIC, problem banks and FAS 166/167 FT Alphaville, May 20, 2010
- FDIC Takes a Whack in P.R. – Agencies Next? ZeroHedge, May 4, 2010
- FDIC Expected to Extend Deposit-Insurance Program Wall Street Journal, April 13, 2010
- Scrutiny rises of failed bank purchases Financial Times, March 28, 2010
- Risk Weight for FDIC Claims and Guarantees, Joint Interagency Statement OCC, March 2, 2010
- Guidance on Obtaining and Retaining Beneficial Ownership Information FIN Cen, Feb. 2010
- FDIC Said to Bar Subprime Executive From Work on Failed Banks Bloomberg, December 16, 2009
- Bair as Banks' Critic Shuns Status Quo as FDIC Term Nears End Bloomberg, December 4, 2009
- FDIC May Tie Underwriter, Rater Pay to Asset-Backed Performance Bloomberg, November 19, 2009
- FDIC Board Adopts Final Rule To Provide A Transitional Safe Harbor FDIC, November 13, 2009
- The FDIC's Other Friday Gambit ZeroHedge, November 13, 2009
- U.S. banks to prepay fees to cover failure costs Reuters, November 12, 2009
- FDIC Chairman Sheila Bair Addresses the Institute of International Bankers Conference November 10, 2009
- FDIC considers securitisation of failed bank assets Risk.net, November 9, 2009
- Comment letter on the FDIC’s proposal for an emergency special assessment Clearing House, May 21, 2009
- 60 Minutes - Your Bank Has Failed: What Happens Next? CBS News, March 6, 2009
- Bartiromo & Bair: One-on-One CNBC interview (running time 11 minutes)