US regulators are starting to structure bank rescue deals so as to limit the potential gains of buyers, a strategy shift that could deflect political criticism of the cost of bank bail-outs.
The Federal Deposit Insurance Corporation, the insurer of US bank deposits, sealed its first such “clawback” arrangement on Friday as part of its deal to sell $21.8bn of assets in Colonial, a bank seized by Alabama regulators, to BB&T.
As in past rescues, BB&T, based in North Carolina, bought the assets at a discount while the FDIC agreed to absorb the bulk of potential losses. In this case, the FDIC agreed to reimburse BB&T for 80 per cent of the first $5bn (£bn) in losses and 95 per cent of further losses up to a ceiling of $14.3bn.
But if losses from the Colonial assets are less than $5bn, BB&T also has agreed to pay some money to the FDIC – on October 15 2019 – in a new feature for bank rescues.
The FDIC confirmed it had “created a mechanism for capturing a portion of BB&T’s discount bid if realised losses are less than expected” and said the strategy might be used again.
The FDIC’s deposit insurance fund fell to $13bn at March 31, its lowest in more than 15 years.
The FDIC is angling for a similar clawback provision as it seeks a buyer for Guaranty Financial, a struggling Texas bank with $14bn of assets, according to people close to the process.
One person who has evaluated banking assets said the regulator was “trying to do that on every deal now”.
Bids for Guaranty were due on Tuesday after a second postponement of the deadline.
Banks ranging from Toronto-Dominion and BBVA to Wells Fargo and New York Community Bank, as well as one private equity consortium, have considered making offers.
In the talks over Guaranty, the FDIC was considering whether to separate Guaranty’s worst assets from the rest of the business, said one person close to the matter.
The FDIC already bears much of the risk for failed banks’ bad assets, but the day-to-day management of those assets is usually handled by the party that buys the rest of each bank’s business. If bad assets were removed from à struggling bank, it is not clear how the FDIC would manage them unless they were quickly sold to another party.
The FDIC’s resources have grown constrained this year after 77 bank failures, and it has been criticised for agreeing to share in billions of dollars of potential losses on some bank rescues in order to lure willing buyers.
Get alerts on Banks when a new story is published