NEW YORK — The Federal Deposit Insurance Corp. is making the purchase of failed banks a bit less sweet. It said it is now offering buyers fewer guarantees for bad loans.
The change could, at least initially, make it more expensive for the FDIC to dispose of sick banks because potential returns for their buyers could decline.
But, in the long term, the weaker guarantees could lower the cost of the banking crisis for the FDIC because the agency would pay out less money to the new owners to cover souring loans at failed banks.
“We’re confident that this step is in line with our least-cost obligations,” that is, the mandate for the FDIC to get the best possible deal in the disposition of failed banks to protect its funds, an FDIC spokesman said in an e-mail to Dow Jones Newswires.
Last year, the FDIC said it entered into 94 loss-sharing agreements, guaranteeing $122 billion of assets; 140 banks failed last year and, in many cases, the FDIC paid buyers to take over failed institutions. So far this year, 41 banks have failed, including four last week.
When the financial crisis began, the FDIC initially didn’t offer any guarantee for loan losses when it sold failed banks. Soon, though, it had to offer more generous terms in order to interest acquirers. Typically, the FDIC has been offering to guarantee 80 percent of potential losses up to a certain threshold, and 95 percent thereafter. Now the FDIC said the 95 percent guarantee “is not necessary” and it will guarantee only 80 percent of potential losses.
“The loss sharing structures up until this point have worked well for the FDIC to help improve pricing and minimize losses, provide liquidity to the FDIC and move assets quickly back into the private sector,” the FDIC said in a statement. The economy has improved and so have prices for failed banks, the agency said.
