Purchase Prices and Bidder Competition in FDIC Purchase and Assumption Transactions

Abstract

In recent years commercial bank failures have increased dramatically. Over the period of 1969 to 1980 there were a total of 94 bank failures; failures in 1985, 1986 and 1987 totaled 118, 138, and 182, respectively. The Federal Deposit Insurance Corporation (FDIC) has primarily used two approaches to deal with failed (closed) banks: 1) the deposit payoff and 2) the purchase and assumption (P&A) transaction. In a deposit payoff insured depositors receive direct payments from the FDIC up to the insurance limit. A payoff imposes losses on the uninsured creditors unless the liquidation generates sufficient cash to meet all obligations. In a P&A the FDIC carries out an auction in which an acquiring institution assumes the failed bank’s deposits and nonsubordinated liabilities and purchases some of the failed bank’s assets. A P&A protects most creditors, who become creditors of the acquiring bank. Losses are borne by the FDIC and the failed bank’s capital suppliers. In general, it appears that the P&A may be less costly to the insurance fund. Over the period 1969 to 1987, approximately three-fourths of insured commercial bank failures were handled through P&A auctions.