Procedures for Immediate and Full Payment of Depositor Claims at Resolution

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1 Procedures for Immediate and Full Payment of Depositor Claims at Resolution Deposit Insurance agency can accelerate the identification of depositors and the value of their claims. It can advance funds to depositors ahead of collections on assets by the receiver; or It can encourage the development of an efficient secondary market for receivership claims.

2 The U.S. appears to be on of very few countries that generally does not freeze accounts at failed banks when they are resolved.

3 Except in unusual circumstances: The FDIC provides all depositors with immediate access to the value of their claims at resolution. Value is determined by poor closure rules or regulatory forbearance. There is no loss of value from either liquidity or present value post-resolution sources.

4 FDIC advances the full insured amount of a depositors claim Funds are made available to depositors typically at the location of the failed bank. Payments are made as deposits if there is an acquiring bank. If no acquiring bank: - by check (at location of failed bank) - by check (mailed within 2-3 days) - at another bank serving as paying agent

5 Uninsured Depositors Receive the full amount on the insured portion of claim. Receive an advance dividend to cover a portion of the uninsured amount. - conservative estimate of the PV of the estimated recoveries

6 How is the FDIC able to do this? It has the legal authority to pay advance dividends. It is provided with required information in advance of its appointment as receiver. - It has access to information from examiners. - Once a bank is viewed as severely under-capitalized and in imminent danger of failing, the FDIC is notified and sends its resolution staff into the bank.

7 Information Collected Assets Information for bid package describing assets by categories in great detail. FDIC staff values various types of assets using information from market and its own experience. Deposits Detailed financial information is needed for bid package. FDIC staff, using account combination software is able to arrive at estimates of insured deposits.

8 Except in the case of fraud, the FDIC is generally able to estimate the recovery values reasonably accurately before the bank is legally resolved and placed into receivership.

9 If after recovery on the assets is completed: The recovery is > the amount advanced, claimants receive an additional dividend. If the recovery is < the amount advanced the FDIC bears the additional loss. The FDIC makes conservative estimates of the present value of the recovery value.

10 Advantages of Immediate Payment It may forestall political pressure by depositors on the government to delay resolving the bank and to protect all depositors in full. Speedy payment may reduce the potential damage to the macro economy need for government guarantee. and the Too-Big-To-Fail

11 Disadvantages of Prompt Payment Reduce market discipline on banks. - if both insured and uninsured depositors know they face a delay in receiving payments they monitor banks, expect higher rates and withdraw funds ( run ) to reflect the risk.

12 Providing depositors with immediate access to the full economic value of their claim may be a double edged sword.

13 Modeling the Access Delay Decision

14 The optimal delay time occurs when the reduction in expected loss from additional market discipline exceeds the increase in expected loss from bailout pressure. (Q in previous diagram)

15 Countries follow different practices in the treatment of depositors These differences in the treatment of depositors at insolvent banks has implications for a country s resolution practices. - The smaller the perceived losses in a failure the easier it is to impose losses on unprotected depositors. -Most countries find it more difficult to resolve large insolvent bans with losses to depositors, because losses are not necessarily minimized and deposits are frozen until private receivers make payment

16 Conclusion The best strategy for achieving aggregate bank stability, characterized by efficient exit of insolvent banks through failure involves resolving banks at the point, or shortly before, their net worth turns negative and providing full and immediate access to insured depositors to the par value of their deposits, and for uninsured depositors the present value of their pro rata share of the estimated recovery value at resolution. This should reduce systemic risk and permit the resolution of banks otherwise considered TBTF.