The encyclopedia · Finance & Accounting · Financial decision · 1991–2013
The FDIC shared future losses with bank buyers to stop fire-sale pricing.
When failed-bank assets scared buyers away, the FDIC absorbed most future losses on covered loans, keeping banks whole and cutting resolution costs.
Federal Deposit Insurance Corporation
the move
When a bank fails, the FDIC must sell it fast, but buyers facing uncertainty about loan quality bid as if the assets were worth their worst-case value, which makes resolutions expensive and can push the FDIC toward costly liquidations. During the savings-and-loan crisis the FDIC's first fix, put guarantees, created moral hazard and was abandoned in 1991.
That same year the FDIC introduced loss-sharing: in a purchase-and-assumption sale it sold the bank whole and agreed to reimburse the acquirer for a pre-specified share of future losses on covered assets. Sixteen agreements resolved 24 bank failures between 1991 and 1993, covering about 40 percent of failed-bank assets, and loss rates on covered assets ran 5.5 percent versus 12.7 percent for first-crisis failures overall.
In the 2008–2013 crisis the FDIC made whole-bank P&A with loss share its primary resolution tool. It estimates the loss-share transactions saved $42 billion, or 13.6 percent of total assets, versus the estimated cost of a payout; the failures themselves cost the deposit insurance fund an estimated $56.8 billion, with $31.4 billion of loss-share payments expected in total. The last loss-share resolution closed in September 2013.
why it works
- Sharing tail losses removes the winner's-curse discount that depresses bids on troubled assets.
- The acquirer still bears part of the losses, keeping its incentive to manage assets well.
- Selling the bank whole preserves franchise value and depositor access versus liquidation.
- First-crisis loss-share assets lost 5.5 percent versus 12.7 percent across all failures.
what transfers
When asymmetric information makes buyers price in worst-case losses, the seller can cut its own cost by sharing the tail risk: the buyer pays more upfront because its downside is capped.
what came after
The FDIC scaled loss share back from 2011 as markets normalized, but it remained the standard answer when no bidder would price a failing bank, and it shaped post-crisis debates about asset separation in Europe. Its logic also lives on in private distressed-asset deals: the seller shares future losses so the buyer pays for value today instead of fear.
references
- Crisis and Response: An FDIC History, 2008–2013 — Chapter 6: Bank Resolutions and Receiverships
- FDIC Resolution Tasks and Approaches: A Comparison of the 1980 to 1994 and 2008 to 2013 Crises (Staff Studies 2020-05)
- The Disposition of Failed Japanese Bank Assets: Lessons from the U.S. Savings and Loan Crisis
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