WASHINGTON – The FDIC last week said it is making changes to the way it handles failed banks and their assets as the result of growing stabilization within the distressed-asset market.
To date, the vast majority of failed-bank resolutions have followed a pattern in which the FDIC sells the bank's assets and deposits to another bank and pledges to cover the bulk of the buyer's losses.
But American Banker, an affiliate of Credit Union Journal, reported that as the economy stabilizes and a growing pool of investors compete with banks for failed assets, observers said the agency is trying new tactics to reduce its losses.
"What you're seeing is the whole process opening up away from plain-vanilla transactions," Kip Weissman, a partner in Luse Gorman Pomerenk & Schick, told American Banker. "The FDIC feels more comfortable experimenting and trying to get better pricing."
The FDIC has formed partnerships with investors to sell assets well after a failure, embraced limited involvement from private-equity buyers and boosted liquidity by selling bonds backed by failed-bank assets. Ten days ago, the agency also removed a bonus layer of protection from loss-sharing deals.
But with both the FDIC and investors showing more confidence about what had been a dead market for toxic loans, observers say even bigger changes may be in store, American Banker reported.
They sense more openness from FDIC officials toward private equity and cite buzz about possible bid packages that would include multiple failed banks. The FDIC is also discussing plans to securitize receivership assets.
As "they did in the savings and loan crisis, they're experimenting as they go along to see what works best, and with a continuing effort to reduce the cost to the" Deposit Insurance Fund, said Ralph "Chip" MacDonald, a partner in the Jones Day law firm in Atlanta.
"They obviously have a lot more experience now in the current markets, and they continue to evolve and try to figure out where the demand is."
Since the early '90s, the FDIC has routinely agreed to share losses with buyers as a way to attract better prices on the hard-to-value assets of failed banks.
The agreements — totaling 126 since the start of 2009 or 70% of the failures in that period — have typically forced the FDIC to cover 80% of a buyer's losses up to a stated threshold, and 95% of losses beyond the threshold.
On March 26, the FDIC said that, in light of the improving economy, it was dropping the option of 95% coverage.
