Resolving Troubled Financial Institutions

Summary

This topic encompasses both the voluntary and the involuntary liquidation of banks, savings associations, credit unions and other types of financial institutions

By federal law, the FDIC, as insurer of the troubled institution's deposits, must be appointed as the Receiver of any financial institution that is put into receivership by its federal charterer/regulator

Most state laws require the state chartering authorities to do the same

In certain cases, the FDIC may "self-appoint" itself as receiver. See 12 USC §1821(c)(4) and (10)

Historically the FDIC has utilized three different types of resolution methods for financially troubled institutions These are "Purchase and Assumption" (P&A) transactions, deposit payoffs and open bank assistance. P&A transactions have been the most numerous. In a P&A transaction

A healthy institution purchases some or all of the assets of a failed bank or thrift and assumes some or all of the liabilities, including all insured deposits. P&As are less disruptive to communities than payoffs. There are many variations of P&A transactions; two of the more specialized P&As are loss sharing transactions and bridge banks
In a "whole bank" P&A transaction the assuming bank purchases all of the assets and assumes all of the liabilities (always with certain exceptions) of the failing bank
Less advantageous to the FDIC is a "partial bank" transaction wherein the acquirer purchases some of the assets and assumes only the insured portion of the troubled institution's deposit liabilities
Even less favorable to the FDIC is an "Insured Deposit Transfer" whereby the solvent institution assumes only the insured deposit liabilities in exchange for the payment to it of an equal amount in cash by the FDIC. In some instances the assuming bank will pay the FDIC a percentage of the liabilities in exchange for the transfer

The least favorable transaction from the FDIC viewpoint is an "Insured Deposit Payout." When no assuming bank can be found, the FDIC repays all depositors in cash the entire amount of their insured deposit (which may be less than their total deposit(s)

Statutory Bases

The FDIC Improvement Act (FDICIA) in 1991 added
four provisions to the FDIA relating to conservatorships and receiverships

Prompt Corrective Action (PCA) under section 38(f) (12 USC 1831o) requires placing an institution into conservatorship or receivership in certain circumstances
Section 11(c)(9) (12 USC 1821(c)(9)) permits the primary federal regulator to appoint the FDIC as conservator or receiver
So-called "General Grounds" for appointment as conservator or receiver under section 11(c)(5) 12 USC 1821(c)(5)
FDIC self-appointment pursuant to section 11(c)(10)
12 USC 1821(c)(10)

Resources and Significant Cases

FDIC Resolution Handbook - 8 page Overview section

FDIC Resolution Handbook - Index page with links to eleven sections of the Handbook

US v Gaubert

White v Knox

Regulations by Agency

OCC

OCC approval is required in all cases when the resulting bank in a so-called "failure acquisition" is a national bank. See the "Failure Acquisition" booklet of the Comptroller's Licensing Manual for procedures and details

12 CFR Part 5 Rules, Policies, and Procedures for Corporate Activities

5.48 Voluntary liquidation

12 CFR Part 9 Fiduciary Activities of National Banks

9.16 Receivership or voluntary liquidation

12 CFR Part 28 International Banking Activities

28.22 Voluntary liquidation

FRB

12 CFR Part 211.7 - Voluntary liquidation of Edge and agreement corporations part of Reg K

"Netting" of obligations between and among financial institutions Reg EE

FDIC

12 CFR Part 340 Restrictions on Sale of Assets by FDIC

340.1 Statutory authority
340.2 Definitions
340.3 Financing with a loan by the FDIC
340.4 Financing regardless of method of financing
340.5 Denying a loan to a buyer
340.6 Effect of this part on transactions
340.7 Certification required
340.8 Workout, resolution or settlement of obligations

12 CFR Part 357 Determination of Economically Depressed Regions

357.1 Economically depressed regions

12 CFR Part 360 Resolution and Receivership Rules

360.1 Least-cost resolution
360.2 Federal Home Loan banks as secured creditors
360.3 Priorities
360.4 Administrative expenses
360.5 Definition of qualified financial contracts
360.6 Treatment by the Federal Deposit Insurance
360.7 Post-insolvency interest

OTS

12 CFR Part 558 Possession by Conservators and Receivers for Federal and State Savings Associations

558.1 Procedure upon taking possession
558.2 Notice of appointment

NCUA

12 CFR Part 709 Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation

709.0 Scope
709.1 Definitions
709.2 NCUA Board as liquidating agent
709.3 Challenge to revocation of charter
709.4 Powers and duties of liquidating agent
709.5 Payout priorities in involuntary liquidation
709.6 Initial determination of creditor claims
709.7 Procedures for appeal of initial determination
709.8 Administrative appeal of the initial determination
709.9 Expedited determination of creditor claims
709.10 Treatment by conservator or liquidating agent
709.12 Prepayment fees to Federal Home Loan Bank
709.13 Treatment of swap agreements in liquidation

12 CFR Part 710 Voluntary Liquidation

710.0 Scope
710.1 Definitions
710.2 Responsibility for conducting voluntary liquidation
710.3 Approval of the liquidation proposal by members
710.4 Transaction of business during liquidation
710.5 Notice of liquidation to creditors
710.6 Distribution of assets
710.7 Retention of records
710.8 Certificate of dissolution and liquidation
710.9 Federally insured state credit union

12 CFR Part 741 Requirements for Insurance

Subpart B Regulations codified elsewhere in NCUA's
               regulations as applying to Federal Credit Unions
               that also apply to Federally Insured State-
               Chartered Credit Unions

741.218 Involuntary liquidation and creditor claims

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