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Sunday, August 30, 2009

FDIC risks $80 Billion in Loss Share Agreements

by Calculated Risk on 8/30/2009 06:46:00 PM

Every Friday, in just about every bank failure press release, the FDIC mentions a loss share agreement with the acquiring bank. As an example, in the press release regarding Mutual Bank of Harvey, Illinois on July 31st:

As of July 16, 2009, Mutual Bank had total assets of $1.6 billion and total deposits of approximately $1.6 billion. In addition to assuming all of the deposits of the failed bank, United Central Bank agreed to purchase essentially all of the assets.

The FDIC and United Central Bank entered into a loss-share transaction on approximately $1.3 billion of Mutual Bank's assets.
emphasis added
For those interested in every detail, here are the Single Family Loss Share Agreement (page 54) and Commercial Loss Share Agreement {page 89) between the FDIC and United Central Bank (the acquirer).

From the WSJ: FDIC Shoulders Big Losses on Loans
[T]he Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. ...

So far, the FDIC has paid out $300 million to a handful of banks under the loss-share agreements. ... The agency estimates the loss-share deals cut will cost it $11 billion less than if the agency seized the assets and sold them at fair-market value.
In most cases, the FDIC agrees to cover 80% of future losses on a big portion of the assets, and 95% on the rest. The FDIC says it doesn't anticipate facing the 95% loss-coverage scenario on any deal. ... Many of the loss-share deals will be in place for up to 10 years.
These agreements definitely make the deals more attractive to potential buyers because the limit the downside.

The article notes that the FDIC "had just $10.4 billion in its deposit-insurance fund at the end of June", but that includes reserves for future losses. And since the FDIC expects losses of $14 billion from these loss share agreements, they should have already reserved for those losses.

Still many of these agreements will be in place for 10 years, and there is the potential for much higher losses.