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January 23, 2015
Bank Failures and the FDIC
This In Focus introduces the Federal Deposit Insurance
faith and credit of the United States. While the DIF was
Corporation’s (FDIC’s) process for resolving failing FDIC
funded to its statutory limit before the recent financial
insured banks. It also identifies policy issues Congress may
crisis, it was rapidly depleted by bank failures during the
consider related to the FDIC, including new resolution
crisis. The DIF balance was at its lowest at the end of 2009
authority established by the Dodd-Frank Act (P.L. 111-
with a negative balance of $20.9 billion. The DIF balance
203).
has recovered to $54.3 billion as of September 30, 2014.
The fund has remained self-financed and did not require
Overview of Bank Failures
federal support during the most recent financial crisis.
Banks fail for many reasons, although most trace back to
the management of bank resources, resulting in a bank’s
Figure 1. Bank Failures by State from 2007 to 2014
inability to meet liquidity or capital requirements. Liquidity
refers to the ability of a bank to meet cash flow needs,
including deposit withdrawals by its customers. Capital
(equity) is the difference between assets and liabilities. A
bank’s capital helps absorb losses on loans, securities
purchased by the bank, and other assets. When a bank’s
capital situation deteriorates such that it fails to meet
minimum regulatory standards, the bank’s primary federal
regulator is required to take Prompt Corrective Action
(PCA). Regulators typically issue PCA letters advising the
bank on specific actions it must take to restore itself to
financial health. When a critically undercapitalized bank
fails to meet PCA requirements, its regulators often will
place the bank into either a conservatorship or receivership
administered by the FDIC.
For most bank failures, the FDIC is appointed as the
receiver by the bank’s primary regulator. The Office of the
Source: CRS with data from FDIC, Failures and Assistance
Comptroller of the Currency (OCC) is the primary regulator
Transactions reports.
for nationally chartered banks. The Federal Reserve
regulates its state chartered member banks. The FDIC
Overview of the Resolution Process
regulates state chartered banks that are not members of the
As receiver of a failed bank, the FDIC evaluates all possible
Federal Reserve. The FDIC does not issue bank charters.
resolution alternatives and selects the one that is least costly
to the DIF. The FDIC used three main resolution methods
Bank Failures, 2007-2014. There were 510 bank failures
between 2007 and 2014: (1) Purchase and Assumption
between 2007 and 2014. Figure 1 illustrates bank failures
transactions, (2) Deposit payoffs, and (3) Deposit Insurance
by state, including Puerto Rico. The rising default rates on
National Bank assumptions. Another method, bridge banks,
real estate loans and the declining value of mortgage-
is a type of purchase and assumption resolution method the
backed securities were major drivers of bank failures. Bank
FDIC has used on a limited basis to resolve large or
failures collectively represent $504 billion in deposits and
complex failing banks.
$692 billion in assets. The largest bank failure was
Washington Mutual Bank with $188 billion in deposits and
Purchase and Assumption Agreement (P&A). The most
$307 billion in assets. Most depository institutions that
commonly used resolution method is the P&A with an
failed were relatively small banks.
acquirer. The FDIC seeks bids from qualified bidders for
the failed bank’s assets and the assumption of certain
Deposit Insurance Fund (DIF). Deposit insurance
liabilities, including deposits, and accepts the bid that is
guarantees repayments of deposits at a bank up to the
judged least costly to the DIF. Based on how the P&A is
insured limit, $250,000. It is intended to prevent bank runs
structured, in most instances, the Acquiring Institution (AI)
and reduce the risk of systemic failure of the banking
purchases a majority, if not all, of the assets and assumes all
system. Banks pay deposit insurance premiums to the
or some of the deposits and certain other liabilities of the
FDIC, which maintains the DIF to meet its obligations of
failed bank. For many of the transactions, the FDIC has
insuring deposits and resolving failed banks. Since the start
offered asset discounts and entered into loss sharing
of federal deposit insurance in 1934, all depositors have
agreements on certain assets purchased by the AI. With loss
been made whole up to their insured limit after a bank
sharing agreements, the FDIC agrees to absorb a portion of
failure. The FDIC deposit insurance is backed by the full
the losses on the sale or the write-downs on the value of
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Bank Failures and the FDIC
certain assets, mainly loans. Loss sharing agreements can
Figure 2. Bank Failures by Year from 2000 to 2014
reduce the immediate negative impact to the DIF by
limiting the amount of losses absorbed by the DIF when
asset prices are declining. The FDIC offered loss sharing
for 304 of the 510 resolutions between 2007 and 2014.
Deposit Payoffs. If no viable P&A AI can be found, then
the FDIC typically deploys a deposit payoff. In a deposit
payoff, the FDIC ensures that the customers of the failed
institution receive the full amount of their insured deposits.
The FDIC retains the assets of the failed institution in its
corporate capacity as receiver. The assets are eventually
sold to maximize the recoveries to the DIF, uninsured
depositors, creditors, and owners of the failed bank.
Deposit Insurance National Bank (DINB). If there are no
viable AIs and the FDIC determines that a deposit payoff
would be disruptive to the community and financial
markets, then the FDIC might use a DINB to resolve a
Source: CRS with data from FDIC, Failures and Assistance
failed bank. In a DINB, the FDIC establishes a new national
Transactions reports.
bank with a charter from the OCC. By law, a DINB charter
Notes: The graph above reflects bank failures for the full years from
can be as long as two years, with optional one-year
January 2000 to December 2014; it does not reflect FDIC assisted
extensions for three more years, but in practice FDIC has
transactions.
chartered a DINB with limited life and surrenders the
charter within a few weeks. A DINB resolution allows
Some have also questioned whether certain provisions of
failed-bank customers a brief period to move their deposits
the Dodd-Frank Act solve or exacerbate the perceived
to other banks. The bank has no capitalization requirements.
problem of “too big to fail.” Too big to fail has remained a
The FDIC retains the majority of the assets in its corporate
concern since the crisis, as assets and deposits at the largest
capacity as the receiver and eventually sells them.
banks have continued to grow. In 2014, the four largest
insured depository institutions each held $1.6 trillion to
Bridge Banks. In a bridge bank P&A, the FDIC initially
$2.6 trillion in assets. Certain provisions in Title I and II of
acts as the acquirer and receiver until the bank is marketed
the Dodd-Frank Act responded to too big to fail by
to external parties. The FDIC may establish bridge banks to
establishing new resolution authority for FDIC, addressing
resolve large or complex failing banks in which more time
specific vulnerabilities of the resolution process that
is needed than a typical DINB resolution. By law, a bridge
surfaced during the crisis. Certain Title I provisions require
bank is initially chartered for two years, with optional one-
each U.S. chartered Bank Holding Company (BHC) or
year extensions for three more years. The FDIC used bridge
foreign banks that have U.S. operations with total assets
banks on a limited basis during the most recent financial
exceeding $50 billion to submit a resolution plan (living
crisis.
will). Other firms deemed likely to present systemic risk to
Policy Issues in the 114th Congress
U.S. financial stability, regardless of size, could also be
required to submit a living will. A living will must describe
Dodd-Frank raised the statutory minimum of the DIF
the company’s strategy for rapid and orderly resolution in
funding ratio from 1.15% to 1.35% and the assessment base
the event of material financial distress or failure of the
was changed. How insurance premium assessments are
company.
apportioned between the largest banks and smaller banks is
subject to debate. The FDIC’s stated goal of building up the
On August 5, 2014, the FDIC and the Federal Reserve
DIF balance to 2.0% of the assessment base could place an
identified specific shortcomings with the 2013 resolution
additional burden on banks, but it may reduce the risk of
plans for the 11 largest banking organizations that will need
drawing on a federal backstop.
to be addressed in the 2015 submissions. In the event that a
resolution under Title I poses a systemic risk to the
Some Members of Congress have expressed concern about
financial stability of the United States, Title II grants the
the declining number of community banks. At this point,
FDIC new resolution powers to use a bridge financial
the decline is primarily due to consolidation, not failures.
company as a secondary option to resolve a non-depository
Bank failures have continued to decline since the height of
institution. No failures have been resolved under Title II to
the crisis, see Figure 2. The total number of FDIC insured
date. Living wills are also expected to provide guidance for
banks decreased by 2,092 between January 2007 and
resolution under Title II.
September 2014. Of this decrease, 1,586 were due to
consolidations and 506 were due to failures.
Raj Gnanarajah, Analyst in Financial Economics
IF10055
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Bank Failures and the FDIC
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https://crsreports.congress.gov | IF10055 · VERSION 2 · NEW