To gain this advantage, member banks must comply with certain liquidity and reserve requirements. Banks are classified into five groups according to their risk-based capital ratio : Well capitalized: 10% or higher Sufficiently capitalized: 8% or higher Undercapitalized: less than 8% Significantly undercapitalized: less than 6% Critically undercapitalized: less than 2%
When a bank becomes undercapitalized, the institution’s primary regulator issues a warning to the bank. When the number falls below 6%, the primary regulator may change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized, the primary regulator closes the institution and designates the FDIC as the bank’s receiver. In the fourth quarter of 2010, 884 banks had very low levels of risk capital protection and were on the FDIC’s “problem list” .
Resolution of Insolvent Banks
Once a bank is determined to be insolvent, its constituent agency – either the state banking department or the U.S. Comptroller’s Office – closes it and designates the FDIC as the receiver. In its role as receiver, the FDIC is tasked with protecting depositors and maximizing compensation for the bankrupt organization’s creditors. The FDIC as receiver is functionally and legally separate from the FDIC in its corporate role as deposit insurer. The courts have long recognized these dual and separate capacities as having different rights, duties, and responsibilities.
The purposes of receivership are to market the assets of a bankrupt organization, liquidate them, and distribute the proceeds to the institution’s creditors. The FDIC, as receiver, inherits the rights, powers, and privileges of the institution and its shareholders, officers, and directors. He or she can collect all liabilities and money owed to the institution, preserve or liquidate its assets and property, and perform any other functions of the institution as designated.
It also has the power to merge a bankrupt institution with another insured depository institution and to transfer its assets and liabilities without the consent or approval of any other agency, court, or party with contractual rights. It can form a new institution, such as a bridge bank, to take over the assets and liabilities of the failed institution, or it can sell or pledge the assets of the failed institution to the FDIC in its corporate capacity.
The FDIC can resolve a closed institution and fulfill its receivership role in two of the most common ways: A purchase and sale agreement (P&A) in which the deposits (liabilities) are assumed by the open bank, which also buys some or all of the loans (assets) of the bankrupt bank.
The bank’s assets, which are transferred to the FDIC as a receiver, are auctioned off and sold in various ways, including online and using contractors. Payment of Deposit , as soon as the relevant chartering authority closes the bank or savings bank, the FDIC is designated as the receiver.
The FDIC, as the insurer, pays all depositors of the failed institution in insured funds the full amount of their insured deposits. Depositors with uninsured funds and other general creditors (e.g., suppliers and service providers) of the failed institution do not receive an immediate or full refund; instead, the FDIC as receiver issues them certificates of acceptance.
The certificate of acceptance entitles its holder to a portion of the receiver’s proceeds of the bankrupt entity’s assets. In 1991, as required by law, the FDIC amended the failure settlement procedures to reduce the costs of the deposit insurance funds.
The procedures require the FDIC to select a resolution alternative that is the least costly to the deposit insurance fund of all possible methods of resolving an institution’s insolvency. Proposals are submitted to the FDIC, where they are reviewed and the lowest cost is determined.