CRISIS and
 

RESPONSE
 An FDIC History, 2008–2013 
ii 

ISBN 978-0-9661808-1-7
 
iii 

Contents 

List of Tables and Figures.................................................................................iv
 

Foreword............................................................................................................vii
 

Acknowledgments...........................................................................................viii
 

Overview ............................................................................................................xi
 

Part 1: Financial Crisis and Response 

Chapter 1. Origins of the Crisis....................................................................3
 

Chapter 2. The Temporary Liquidity Guarantee Program: 


A Systemwide Systemic Risk Exception ....................................................33
 

Chapter 3. Use of Systemic Risk Exceptions for Individual 


Institutions during the Financial Crisis.....................................................67
 

Part 2: Banking Crisis and Response 

Chapter 4. Bank Supervision.....................................................................101
 

Chapter 5. Deposit Insurance: Fund Management and Risk-Based 


Deposit Insurance Assessments................................................................151
 

Chapter 6. Bank Resolutions and Receiverships.....................................175
 
iv 

List of Tables and Figures
 

Note: Readers should note that if no source is given for data, the source for that data 

is the FDIC. 

Figure 1.1. S&P/Case-Shiller Home Price Index, 1987–2013.............................................. 8 

Figure 1.2. Real Home Price Index, 1890–2013..................................................................... 8 

Figure 1.3. Home Sales and Home Price Index, 2000–2013 .............................................. 14 

Figure 1.4. Mortgage Loans Past Due, by Type of Loan, 2000–2013................................ 15 

Figure 1.5. Issuance of Mortgage-Backed Securities, 1990–2013 ..................................... 17 

Figure 1.6. Mortgage Credit Default Swap ABX Indexes ................................................... 21 

Figure 1.7. Markets Heat Map................................................................................................. 29 

Figure 2.1. Interbank Lending Spreads, December 2006–December 2010..................... 39 

Figure 2.2. Trends in Senior Unsecured U.S. Bank Debt Issuance before and after 

September 2008 ..................................................................................................... 40 

Figure 2.3. DGP Debt Outstanding, October 2008–December 2012 .............................. 45 

Figure 2.4. Amounts Guaranteed by the TAGP, 2008–2010 .............................................. 53 

Figure 2.5. DGP Debt Outstanding by Type, October 2008–December 2009 ............... 54 

Figure 2.6. Maturities of TLGP Debt Outstanding at Month End, 

October 2008–October 2009............................................................................... 55 

Figure 2.7. Funding Costs: TLGP Debt vs. Non-Guaranteed Debt, 

January 2007–October 2009................................................................................ 55 

Figure 2.8. TLGP vs. Non-TLGP Debt Issuance, October 2008–October 2009............. 56 

Figure 2.9. The Costs of the TAGP: The 5 Most Expensive Failures vs. All Others 

($ Millions, as of December 31, 2016) ............................................................... 58 

Table 2.A. Issuers of $250 Million or More in FDIC-Guaranteed Debt ......................... 61 

Figure 3.1. Timeline of Wachovia Events.............................................................................. 69 

Table 3.1. Top Ten Banking Organizations by Depository Institution Asset Size, 

June 30, 2008.......................................................................................................... 70 
v 

Figure 3.2. Timeline of Citigroup Events .............................................................................. 77
 

Table 3.2. Citigroup Asset Guarantee Loss Positions........................................................ 83
 

Figure 3.3. Timeline of Bank of America Events ................................................................. 86
 

Table 3.3. Bank of America Asset Guarantee Loss Positions ........................................... 90
 

Figure 4.1. Real Estate Loans as a Percent of Total Loans, 1996–2016
 

(Banks with Total Assets < $10 Billion)........................................................... 106
 

Table 4.1. Number of Problem Banks and Failures, 2007–Q1 2017 ............................. 119
 

Figure 4.2. Downgrades of 1- and 2-Rated Banks: Ratio of ADC Loans to Capital .... 120
 

Figure 4.3. Downgrades of 1- and 2-Rated Banks: Asset Growth................................... 121
 

Figure 4.4. Downgrades of 1- and 2-Rated Banks: Ratio of Wholesale Funding
 

to Total Assets...................................................................................................... 122
 

Figure 4.5. Cumulative Failure Percentage by Equity-to-Asset Ratio, 2003–2016....... 123
 

Figure 4.6. Number of Formal Safety-and-Soundness Enforcement Actions
 

Issued by FDIC, 2000–2016............................................................................... 128
 

Table 4.2. Supervisory Focus and Outcomes for Selected Banking Organizations.... 134
 

Figure 4.7. Status of Institutions on Problem-Bank List, 2008–Q1 2017....................... 137
 

Figure 4.8. Return on Equity, 1869–2014............................................................................ 139
 

Figure 5.1. Timeline of Events and Reserve Ratio Trends Q1 2007–Q3 2016 .............. 156
 

Figure 5.2. Contingent Loss Reserve, DIF Portfolio Liquidity, and DIF Balance,
 

Q1 2007 – Q4 2010 ............................................................................................. 159
 

Table 5.A.1. Assessment Rate Schedule, Q1 2009................................................................ 169
 

Table 5.A.2. Assessment Rate Schedule, Q2 2009–Q1 2011 .............................................. 169
 

Table 5.A.3. Assessment Rate Schedule, Q2 2011–Q2 2016 .............................................. 170
 

Table 5.A.4. Assessment Rate Schedule, Q3 2016 to Present (After the reserve ratio
 

reaches 1.15 percent but is less than 2.0 percent) .......................................... 171
 

Table 5.A.5. Assessment Rate Schedule (After the reserve ratio reaches 2.0 percent
 

but is less than 2.5 percent)................................................................................ 172
 

Table 5.A.6. Assessment Rate Schedule (After the reserve ratio reaches 2.5 percent)... 173
 
vi 

Table 6.1. Comparison of Franchise Sales and Retained Asset Sales............................ 178
 

Figure 6.1. Number of FDIC Bank Resolutions by Year................................................... 182
 

Figure 6.2. Total Assets of Failed Banks by Year of Resolution ....................................... 183
 

Table 6.2. Common P&A Transactions............................................................................. 189
 

Table 6.3. FDIC Bank Resolutions by Resolution Type, 2008–2013............................. 200
 

Table 6.4. FDIC Losses by Resolution Type, 2008–2013 ................................................ 200
 

Table 6.5. Selected Condition Indicators by Resolution Type ....................................... 201
 

Figure 6.3. Failed Banks as a Percentage of All Banks by Year from Start of
 

Each Crisis............................................................................................................ 203
 

Figure 6.4. Total DRR Authorized and On-Board Full-Time Staff, 2008−2011........... 204
 

Figure 6.5. Loans, ORE, and Subsidiaries in Liquidation, 2008−2013........................... 211
 

Table 6.6. LLC Recovery Rates............................................................................................ 218
 

Figure 6.6. Loss-Share Asset Portfolio at Resolution, Number and Dollar Amount... 221
 
vii 

Foreword 

A decade ago the U.S. financial system experienced its worst crisis since the 1930s. 

Far from being confined to the U.S. banking industry, the crisis would turn out to be 

a global systemic event. Stemming the crisis required unprecedented actions by the 

U.S. government, including the FDIC, to restore confidence in financial markets and to 

address the problems of systemically important financial institutions. 

The purpose of this volume is to present a firsthand account of the important role that 

the FDIC played in responding to the crisis. We hope it will serve as a guidepost for future 

policymakers who will someday be called upon to respond to the next period of financial 

instability. It also conveys an important lesson: We must not become complacent when 

economic and banking conditions appear strong. It is precisely during these times that 

the seeds can be sown for the next financial crisis. 

This study is organized into two parts. The first, Chapters 1 through 3, is an account 

of the origins of the crisis and the FDIC’s unprecedented use of emergency authorities to 

respond to financial market illiquidity and the problems of systemically important financial 

institutions. The second, Chapters 4 through 6, documents the challenges that the FDIC 

faced in carrying out its core missions of bank supervision, deposit insurance, and failedbank resolution. This seems to us the best framework for understanding the role that the 

FDIC played during the crisis and the lessons for the future. 

Executives and staff from across the FDIC made important contributions to this history. 

I would like to extend a special thanks to Diane Ellis, Director of the FDIC Division of 

Insurance and Research, and to Fred Carns, her Principal Advisor, for leading this effort. 

I would also like to acknowledge Sheila C. Bair, the FDIC Chairman during the crisis, 

whose leadership was central to the FDIC’s response. 

I believe this work will prove to be a valuable account of this extraordinary period in 

U.S. financial history and of the critical contributions made by the FDIC. 

Martin J. Gruenberg 

Chairman, FDIC 

Washington, DC, November 30, 2017 
viii 

Acknowledgments 

One of the FDIC’s strengths as an institution has been a steadfast belief among its staff in 

the importance of its mission to maintain the nation’s financial stability. That dedication 

has been especially evident when banking crises have occurred, and the crisis years of 

2008–2013 demonstrated that commitment yet again. 

This study seeks to examine what took place during the recent crisis, with an aim not 

only of providing a historical record but also of helping in the development of better 

strategies and planning for the future. Every effort was made to ensure the accuracy 

of the information presented in the study. This account of the crisis years relies on the 

experience and knowledge of staff from across the FDIC, many of whom were personally 

involved in the difficult environment the agency faced during the period from 2008 to 

2013, and whose perspectives greatly assisted the study’s authors. The study does not 

necessarily reflect the views of the FDIC. 

The FDIC’s Division of Insurance and Research organized and led the writing of this 

history. The history was produced under the direction of Fred Carns, Principal Advisor 

to the Director, Division of Insurance and Research. Rosalind Bennett and Lee Davison, 

both from the Division of Insurance and Research, were responsible for day-to-day 

management of the study. 

The study’s primary authors were as follows: 

Part 1: Financial Crisis and Response 

Chapter 1. Origins of the Crisis 

Cynthia Angell and Krishna Patel 

Chapter 2. The Temporary Liquidity Guarantee Program: A Systemwide Systemic 

Risk Exception 

Lee Davison 

Chapter 3. Use of Systemic Risk Exceptions for Individual Institutions during the 

Financial Crisis 

Whitney Cromie, Myron Kwast, and Ashley Mihalik 

Part 2: Banking Crisis and Response 

Chapter 4. Bank Supervision 

Doreen Eberley and George French 

Chapter 5. Deposit Insurance: Fund Management and Risk-Based Deposit Insurance 

Assessments 

Whitney Cromie, Schuyler Livingston, and Ashley Mihalik 

Chapter 6. Resolutions and Receiverships 

Lynn Shibut 
ix 

Many senior officials and staff from the FDIC provided valuable information through 

insightful comments on, or suggested revisions of, drafts of each of the chapters. These 

officials and staff include, from the Office of the Chairman: Barbara Ryan, Jason Cave, 

and Kymberly Copa; from the Division of Risk Management Supervision: Doreen 

Eberley, Patricia Colohan, Lisa Roy, Larissa Collado, Lisa Garcia, Donald Hamm, 

Thomas Lyons, Serena Owens, Karl Pagel, Camille Schmidt, Derek Sturtevant, Richard 

Thompson, and Toni Wong; from the Division of Resolutions and Receiverships: Bret 

Edwards, Penelope Moreland-Gunn, Tom Murray, Martha Duncan, Pamela Farwig, 

Sheri Foster, Wendy Hoskins, Phil Mangano, Brandon McGuire, Richard Salmon, 

and Sharon Yore; from the Legal Division: Charles Yi, Colleen Boles, Floyd Robinson, 

Ruth Amberg, and R. Penfield Starke; from the Division of Depositor and Consumer 

Protection: Mark Pearce and Keith Ernst; from the Office of Complex Financial 

Institutions: Arthur Murton, Maureen Sweeney, and Herbert Held—and the former 

Director of the Office of Complex Financial Institutions, James Wigand, also provided 

very helpful comments and suggestions; from the Office of Communications: Barbara 

Hagenbaugh and Carly Brewster; and from the Division of Insurance and Research: 

Richard Brown, Matthew Green, Jack Reidhill, and Munsell St. Clair. Previous research 

by former staff from the Division of Insurance and Research also contributed to the 

project: Kenneth Jones, Rose Kushmeider, Heather Etner, and Katherine Wyatt. 

A number of FDIC staff provided valuable research and analytical support. 

These staff members include, from the Division of Insurance and Research: Chacko 

George, Theron Gray, Charles James, Caitlyn Kasper, Mark Kutzbach, and Philip 

Ostromogolsky; from the Division of Risk Management Supervision: Kathryn Battle, 

Charles Collier, Eugenio Draschner, Colby Thomas, and Kenneth Weber; from the 

Legal Division: Rachel Ackmann and George de Verges; and from the Division of 

Resolutions and Receiverships: Jianting Hu. 

Heather Woods, from the FDIC’s Graphic Design and Printing Unit, prepared all the 

chapters for publication and provided design support; Donna Vogel, from the Division 

of Insurance and Research, and Alan Levy, from the Office of Communications, 

assisted with Web design. Jane Lewin thoroughly edited the text. 

Diane Ellis 

Director, Division of Insurance and Research 
x CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
xi 

Overview
 

Introduction 

In 2008, the United States was confronted with its most severe financial crisis since 

the Great Depression. The financial crisis, in turn, resulted in a prolonged economic 

contraction—the Great Recession—with effects that spread throughout the global 

economy. Many books and papers have been written on the causes and implications of 

the financial crisis of 2008 and 2009. 

This volume reviews the experience of the FDIC from 2008 to 2013, a period during 

which it was confronted with not one but two interconnected and overlapping crises. 

First, the financial crisis in 2008 and 2009 threatened large financial institutions of all 

kinds, both inside and outside the traditional banking system, and thus endangered 

the financial system itself. Second, a banking crisis, accompanied by swiftly increasing 

numbers of both troubled and failed insured depository institutions, began in 2008 and 

continued until 2013. For a chronology of significant events over this period, see the 

timeline that appears at the end of this overview. 

The two crises put the FDIC in the position of having to face multiple challenges 

simultaneously. In response to the financial crisis, the basic problem was the need to 

contain systemic risk and restore financial stability. To achieve this, the FDIC took 

unprecedented actions using emergency authorities. In response to the banking crisis, 

the FDIC had to deal with challenges relating to bank supervision, the management of 

the Deposit Insurance Fund, and the resolution of failed banks—challenges similar to 

those the FDIC had faced in the banking and thrift crisis of the 1980s and early 1990s. 

This study examines the FDIC’s response to both crises and seeks to contribute to an 

understanding of what occurred and also to present some lessons the FDIC has learned 

from its experience. The study is divided into two parts. Part 1 focuses on the financial 

crisis of 2008–2009—its causes and the FDIC’s response—and Part 2 focuses on the 

FDIC’s response to the banking crisis of 2008–2013. 

As delineated in the first chapter of Part 1, the causes of the financial crisis lay partly 

in the housing boom and bust of the mid-2000s; partly in the degree to which the U.S. 

and global financial systems had become highly concentrated, interconnected, and 

opaque; and partly in the innovative products and mechanisms that combined to link 

homebuyers in the United States with financial firms and investors across the world. 

As delineated in the remaining two chapters of Part 1, the financial crisis that followed 

the housing market’s collapse was so severe that, for the first time, the U.S. government 

turned to a statutory provision that had been put in place as part of the Federal Deposit 

Insurance Corporation Improvement Act of 1991 to help it deal with systemic risks. 
xii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

This provision prohibited assistance to failing banks if FDIC funds would be used to 

protect uninsured depositors and other creditors—but the act also contained a provision 

allowing an exception to the prohibition when the failure of an institution would pose a 

systemic risk.1

 In 2008, by relying on the provision that allowed a systemic risk exception, 

the FDIC was able to take two actions that maintained financial institutions’ access to 

funding: the FDIC guaranteed bank debt and, for certain types of transaction accounts, 

provided an unlimited deposit insurance guarantee. In addition, the FDIC and the other 

federal regulators used the systemic risk exception to extend extraordinary support 

to some of the largest financial institutions in the country in order to prevent their 

disorderly failure. 

Accompanying the financial crisis was the banking crisis, which challenged every 

aspect of the FDIC’s operations, not only because of its severity but also because of the 

speed with which problems unfolded. Focused on specifically in Part 2 of this study are 

(1) bank supervision (how significant was industry risk, what were the characteristics 

of troubled and failed banks, what role was played by bank examinations and other 

supervisory efforts before and during the crisis, and how effective were these efforts); 

(2) management of the Deposit Insurance Fund and the methodology used for assessing 

banks for deposit insurance coverage, both before and during the crisis (what changes 

were made and what extraordinary measures were required); and (3) the resolution of 

the hundreds of banks that failed during the six-year period (what methods did the FDIC 

pursue and how effective were they). 

In the remainder of this overview, a brief account of the magnitude of the problems 

the FDIC faced is followed by synopses of the study’s six chapters, a brief conclusion, a 

postscript about the banking industry in 2017, and a timeline of the crisis period. 

The Magnitude of the Problems 

It is important to recall just how significant both of these crises were. The financial crisis 

and the recession with which it was associated were the worst economic dislocation 

since the Great Depression. There were large losses in economic output and large 

declines in employment, household wealth, and other economic indicators. Not only 

did the U.S. economy lose 8.8 million jobs, but half of those losses occurred within the 

six months that immediately followed the height of the financial crisis in the autumn 

of 2008. In 2009, the year when foreclosures peaked, 2.8 million mortgage loans were 

in foreclosure, almost four times the number in 2005.2

 The cumulative net cost to the 

U.S. economy has been estimated by the U.S. Government Accountability Office and 

1 See pp. xii-xiii for further explanation of the systemic risk exception. 

2 These are FDIC estimates based on data from the Mortgage Bankers Association and the American 

Housing Survey. 
OVERVIEW xiii 

others to range from more than $10 trillion to $14 trillion in today’s dollars, or up to 

roughly 80 percent of an entire year’s gross domestic product.3 

As for the financial crisis, its severity was reflected in the size of the government’s 

emergency response. The Federal Reserve initiated numerous programs designed 

to provide short-term liquidity to banks and other financial institutions as well as to 

borrowers and investors. In the six weeks following the September 15, 2008, bankruptcy 

of the investment bank Lehman Brothers, the Federal Reserve’s balance sheet doubled 

to about $2 trillion.4

 On September 19, the Department of the Treasury announced that 

it would provide a guarantee for money market mutual funds, standing behind more 

than $3.5 trillion in assets.5

 On October 3, Congress authorized $700 billion to fund the 

Troubled Asset Relief Program (TARP), and about $245 billion of that would be used 

to shore up the capital of financial institutions.6

 Ten days later the FDIC announced its 

Temporary Liquidity Guarantee Program that would eventually guarantee more than 

$600 billion in debt issued by financial institutions and their affiliates.7

 At the level of 

individual firms, JPMorgan Chase’s acquisition of the investment bank Bear Stearns in 

May 2008 was facilitated by a $29 billion loan from the Federal Reserve Bank of New 

York.8

 The multinational insurance corporation American International Group (AIG) 

initially was rescued with an $85 billion credit facility, also from the Federal Reserve Bank 

of New York.9

 Fannie Mae and Freddie Mac, two government-sponsored enterprises that 

support the mortgage market, were taken into government conservatorships that the 

U.S. Treasury would eventually support with a total investment of $189.5 billion.10 

The banking crisis, too, was severe. From 2008 through 2013 almost 500 banks failed, 

at a cost of approximately $73 billion to the Deposit Insurance Fund (DIF). Among 

these failures was that of IndyMac, in June 2008, which, with losses of about $12 billion, 

remains the most expensive failure in FDIC history; and, in September 2008, that of 

Washington Mutual, which, with $307 billion in assets, remains the largest failure in 

3 U.S. Government Accountability Office, Financial Regulatory Reform: Financial Crisis Losses and Potential 

Impact of the Dodd-Frank Act, GAO 13-180, February 14, 2013, https://www.gao.gov/products/GAO-13­

180. 

4 Changes in the Fed’s balance sheet are detailed at https://www.federalreserve.gov/monetarypolicy/bst_ 

recenttrends.htm. 

5 The Treasury’s program is described at https://www.treasury.gov/press-center/press-releases/Pages/ 

hp1161.aspx; for assets in money market mutual funds in 2008, see https://fred.stlouisfed.org/series/ 

MMMFFAQ027S. 

6 A discussion of TARP investments in banks can be found at https://www.treasury.gov/initiatives/financialstability/TARP-Programs/bank-investment-programs/Pages/default.aspx. 

7 See chapter 2 of this volume. 

8 For the Bear Stearns transaction, see https://www.federalreserve.gov/regreform/reform-bearstearns.htm. 

9 For the initial aid to AIG, as well as additional government actions to assist the firm, see https://www. 

newyorkfed.org/aboutthefed/aig. 

10 https://www.fhfa.gov/Conservatorship/pages/history-of-fannie-mae--freddie-conservatorships.aspx. 
xiv CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

FDIC history. Although these and other large banks failed, most of the failed institutions 

were community banks, often in parts of the country where the subprime mortgage crisis 

and the recession made real estate problems more severe than elsewhere. And although the 

number of failures during this period was considerably lower than it had been in the 1980s 

and early 1990s, this crisis unfolded much more rapidly. The DIF fell to the lowest point 

in its history, a negative $20.9 billion on an accounting basis, by year-end 2009. Less than 

two years earlier, in March 2008, it had reached what was then an all-time high of $52.8 

billion.11 During the same period (between March 2008 and year-end 2009), the number of 

problem banks rose from 90 to just over 700. Problem banks would peak in early 2011 at 

almost 900, constituting nearly 12 percent of all FDIC-insured institutions.12 

The large numbers of troubled and failed banks and the need to successfully manage 

the FDIC’s funding requirements contributed to a substantial increase in workload 

across all operational areas of the FDIC. 

Part 1: Financial Crisis and Response 

The first chapter in Part 1 explores the causes of the financial crisis. The remaining two 

chapters focus on the ways in which the FDIC confronted the systemic consequences of 

that crisis in 2008 and 2009. 

Chapter 1. Origins of the Crisis 

The U.S. financial crisis of 2008 followed a boom and bust cycle in the housing market 

that originated several years earlier and exposed vulnerabilities in the financial system. 

The downturn began as a housing crisis that initially seemed concentrated in certain 

states but eventually led to a nationwide decline in house prices. The financial system had 

been integral to the housing boom and was highly exposed to the housing market. Thus, 

when the housing downturn proved to be exceptionally severe, it threatened to drag 

down the financial system with it in the absence of significant government intervention. 

The collapse of the U.S. housing market in 2007 and the accompanying financial crisis 

resulted in a prolonged economic contraction—the Great Recession—the effects of 

which spread throughout the global economy. 

The nationwide housing expansion of the early 2000s was rooted in a combination of 

factors, including a extended period of low interest rates. By mid-2003, both long-term 

11 See chapter 5 of this volume. 

12 See chapter 4 of this volume. 
OVERVIEW xv 

mortgage rates and the federal funds rate (the rate at which depository institutions lend 

reserve balances to each other overnight and which affects other market interest rates) had 

declined to levels not seen in at least a generation.13 One response to low interest rates was 

an acceleration in U.S. home price appreciation to double-digit rates for the first time since 

1980.14 Another response was a series of mortgage market developments that dramatically 

weakened credit standards in mortgage lending; the weakened standards were reflected 

most prominently in subprime, Alt-A, and hybrid ARM instruments. These market 

developments were associated with a glut of savings held by investors seeking high-yield 

assets; a complex and opaque securitization process that bundled mortgages into mortgagebacked securities; the use of poorly understood derivative products; and speculation based 

on the presumption that housing prices would continue to increase. 

Other factors were in play as well in the years leading up to and during the housing 

market expansion. Financial innovation and deregulation contributed to an environment 

in which the U.S. and global financial systems became far more concentrated, more 

interconnected, and, in retrospect, far less stable than they had been in previous decades. 

The conversion of housing assets to financial assets through the development of various 

mortgage securities and derivatives created risks that were not well understood and that 

exposed institutions with higher leverage to greater losses in the event mortgage defaults 

were to increase. The factors that helped fuel a housing boom therefore made the U.S. 

financial system more vulnerable to collapse in times of stress. 

Initial signs of the housing collapse to come emerged in 2006, as the housing market 

expansion slowed. The slowdown eliminated the expectation of future investment gains 

and, along with it, the ability of borrowers to refinance. Without the expectation of rising 

prices, lenders were unwilling to originate new mortgages. As interest rates rose and 

house prices began to fall, many homeowners became unable to meet mortgage payments 

on their existing loans or refinance into a new loan, and mortgage defaults rose rapidly. 

Yet, through the end of 2006, most macroeconomic indicators continued to suggest 

that the U.S. economy would proceed uninterrupted on its path of moderate growth. 

There was little in the way of financial data to suggest that the U.S. and global economies 

were on the verge of a financial system meltdown. In hindsight, however, we know that 

by the mid-2000s the United States was experiencing a housing price bubble of historic 

proportions, and by 2006 the first signs of trouble were already apparent. In 2007, when 

the bubble burst, the financial systems of the world’s most advanced economies were 

brought relatively quickly to the brink of collapse. 

How did this happen? Ultimately, as house prices declined nationwide and mortgage 

defaults began rising, the value of all the mortgage-backed securities deteriorated. The rise 

13 In July 2003, the federal funds rate declined to 1.01 percent, its lowest level in 45 years. In June 2003, the 

Freddie Mac 30-year conventional mortgage rate fell to 5.21 percent, the lowest level in the 32-year history 

of the Primary Mortgage Market Survey. 

14 S&P CoreLogic Case-Shiller U.S. Home Price Index. 
xvi CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

in defaults, by undermining the value of trillions of dollars of mortgage-backed securities, 

severely disrupted the securitization funding mechanism itself. That mechanism—the 

securitization system that generated mortgage-backed securities from mortgages— 

had become opaque and very complex, and the financial institutions involved were 

highly leveraged. These securities were further used to create various mortgage assets 

and derivatives intended to diversify the risk. However, the lack of transparency and 

the complexity of the securities masked the risk, and the high leverage left investors 

with little capital to cushion loss. Moreover, the financial institutions had underpriced 

risk, having been lulled into complacency by the prolonged period of economic stability 

that preceded the onset of problems. When mortgage defaults began to rise, the system’s 

interconnectedness, complexity, lack of transparency, and high leverage exacerbated 

the effects of the crisis. Eventually, many of the largest financial institutions suffered 

catastrophic losses on their portfolios of mortgage-related assets, and these losses 

resulted in severe liquidity shortages. Even financial institutions without large exposures 

to mortgage assets or derivatives were affected because they were deeply interconnected 

with the financial system in which these exposures played so significant a role. 

Observing the devastating cascade of falling house prices, subprime mortgage defaults, 

bankruptcies, and write-downs in the value of mortgage assets, investors and creditors 

lost confidence in the financial markets. The credit markets froze, and at the same time 

many overleveraged financial institutions were forced to sell assets at fire-sale prices, 

further reducing liquidity. Under the accounting rules of the time, these asset sales 

only precipitated further rounds of asset write-downs. Eventually, the situation became 

so dire that government interventions on an unprecedented scale were undertaken to 

break the downward spiral of defaults and to restore confidence in, and functionality to, 

the financial marketplace. 

Chapter 2. The Temporary Liquidity Guarantee Program: A 

Systemwide Systemic Risk Exception 

In the fall of 2008, credit markets—particularly short-term markets—were essentially 

frozen. Many banks and bank holding companies found it hard to roll over debt at a 

reasonable cost. In early October, as these problems continued to worsen in many 

nations, the G7 finance ministers announced a plan that focused on maintaining 

liquidity, strengthening capital, and preserving market stability. As a result, many 

advanced economies chose to both guarantee debt issued by financial institutions and 

expand deposit insurance guarantees. 

The U.S. government needed to find not only a mechanism by which bank debt could 

be guaranteed but also the resources that would be needed to stand behind that guarantee. 

The mechanism was provided by the systemic risk exception (SRE) established under 
OVERVIEW xvii 

the Federal Deposit Insurance Corporation Improvement Act of 1991. The act generally 

required the FDIC to resolve failed banks in a manner that was least costly to the Deposit 

Insurance Fund and required the FDIC not to deviate from this least-cost requirement 

in order to protect uninsured depositors and other creditors. But the act also included 

the SRE provision that permitted the suspension of this “least cost” requirement if the 

FDIC Board and the Federal Reserve Board each voted to recommend the exception to 

the Secretary of the Treasury, who, in consultation with the President, then determined 

that the exception was warranted. Invoking the SRE required a consensus that closing 

the bank in question would have “serious adverse effects on economic conditions and 

financial stability” and that providing assistance under the SRE would “avoid or mitigate 

such adverse effects.”15 

A broad interpretation of the SRE gave policymakers an avenue through which the 

FDIC could (1) extend its guarantee to newly issued debt instruments of FDIC-insured 

institutions, their holding companies, and their affiliates; and (2) provide unlimited 

deposit insurance coverage of non-interest-bearing transaction accounts. The extension 

of the FDIC guarantee to the newly issued debt instruments would come under a program 

to be called the Debt Guarantee Program (DGP). The unlimited deposit insurance 

coverage would come under a program to be called the Transaction Account Guarantee 

Program (TAGP). Together, the DGP and TAGP made up the FDIC’s Temporary 

Liquidity Guarantee Program (TLGP), which was designed to preserve and enhance the 

liquidity of the banking system during a time of crisis. 

It should be noted that the TLGP was integral to a wider U.S. government response 

to systemic risk in the banking system. At the same time that the FDIC was developing 

the TLGP, the Department of the Treasury, using an authority and funding provided by 

Congress, used the TARP to inject capital into the nation’s banks. The Federal Reserve 

added the Commercial Paper Funding Facility (CPFF) to the series of programs it 

had been undertaking since 2007 to provide liquidity to borrowers and investors. The 

programs launched by the FDIC, the Treasury, and the Federal Reserve were designed to 

work together to restore liquidity to the financial system. 

Policymakers had to decide how the specifics of the FDIC’s TLGP would be 

implemented. This was particularly true for the debt guarantee component, as it was 

unprecedented and thus created challenges for the agency. How broad should the 

guarantee be? Should it cover debt already outstanding? Should it cover debt issued by 

bank holding companies and affiliates as well as by insured depository institutions? Should 

fees be assessed for participation, and if so, how much should be charged? Policymakers 

reached a consensus that only newly issued debt would be guaranteed, that bank holding 

company debt would be eligible but that participation by thrift holding companies would 

be limited, and that applications for debt guarantees by nonbank affiliates would have to 

15 12 U.S.C. §1823 (G) (1994). 
xviii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

be approved by the FDIC. It was also agreed that low but meaningful fees for the FDIC 

guarantee were appropriate. The program was designed to be funded by the banking 

industry and not by taxpayers or the DIF. 

For the two programs to be in place on October 14, 2008—the day the TLGP 

would be announced—the FDIC had to work swiftly. As noted above, the debt 

guarantee component created the most complex challenges because the FDIC had 

never administered a program that guaranteed nondeposit liabilities. But through a 

consultative process with the banking industry as well as expedited rulemaking that 

provided for public notice and comment, the FDIC was able to significantly improve the 

program during its initial months. 

Participation in both of these programs was voluntary. After the first month, during 

which all eligible entities were covered, eligible entities were able to opt out of either one 

of the programs or both. Initially, more than half of the eligible entities remained in the 

DGP, but a far greater proportion of insured institutions remained in the TAGP. In the 

end, just over 100 mostly large entities issued guaranteed debt. 

The DGP capped guaranteed debt issuance in a way that would allow participants to 

roll over existing debt and have some capacity to allow debt issuance to grow modestly. 

Initially, the DGP was to end on June 30, 2009, and the guarantee was to expire on June 

30, 2012, but the FDIC extended the program to facilitate an orderly exit. The end-date 

was moved to October 31, 2009, and the guarantee period to December 31, 2012. In May 

2009, guaranteed debt outstanding peaked at about $350 billion. 

The FDIC at first proposed a flat pricing mechanism but quickly changed to a sliding 

scale based on debt maturity. Some economists have suggested that the FDIC’s pricing 

method could have been more sophisticated and that the method used led to a larger 

subsidy than was necessary. But it is important to note that pricing was not the only tool 

with which the FDIC addressed risk: considerations of safety and soundness led the FDIC 

to restrict or prohibit the DGP participation of more than 1,600 insured institutions and 

1,400 bank holding companies. 

The TAGP guaranteed, until year-end 2009, all funds held in non-interest-bearing 

transaction accounts at participating banks, but the program was extended twice, first 

through June 30, 2010, and then through year-end 2010. This was the first time the FDIC 

had offered deposit coverage over the statutory amount, and the increase was designed 

to avoid runs at healthy banks. The TAGP charged fees for participation, first a flat 

rate but then, with the first extension, at a rate that depended on risk as reflected by an 

institution’s deposit insurance assessment category.16 

Had fees from the TLGP been insufficient to cover the program’s expenses, the FDIC 

would have had to levy an assessment on all insured depository institutions to make good 

the loss. However, in the end the TLGP’s fees greatly exceeded the program’s costs: the 

16 Assessment categories are discussed in chapter 5 of this volume. 
OVERVIEW xix 

FDIC collected $10.4 billion in DGP fees but lost only $153 million because of defaults. 

For the TAGP the FDIC collected $1.2 billion in fees, and at year-end 2016 the program’s 

costs were $1.5 billion. 

The DGP reopened short- and medium-term debt markets to financial institutions, 

enabling these institutions to address their financing needs during a period of 

unprecedented turmoil in the financial system. The DGP lowered the firms’ cost of 

funding because DGP debt received the same ratings that U.S. government securities 

received. The program allowed debt markets to stabilize, and starting in early 2009, 

banks were able gradually to increase the amount of non-guaranteed debt they issued, so 

that by a year after its creation, the DGP was terminated without difficulty. 

The TAGP made a difference by stabilizing deposit funding for banks. Many banks, 

particularly community banks, depend on transaction account deposits as a source 

of funds, but because of the crisis there was a substantial risk that businesses and 

municipalities that maintained such accounts would withdraw large amounts of deposits. 

The TAGP significantly lessened that risk. 

Chapter 3. Use of Systemic Risk Exceptions for Individual 

Institutions during the Financial Crisis 

In late 2008 and early 2009, the systemic risk exception was invoked in response to serious 

financial difficulties at three of the nation’s largest banking organizations: Wachovia 

Corporation (Wachovia), Citigroup, Inc. (Citigroup), and Bank of America Corporation 

(Bank of America, or BofA).17 

Wachovia. As of June 2008, Wachovia had the fourth-largest volume of banking assets 

in the United States and was the largest holder of payment-option adjustable rate 

mortgages (ARMs). On September 25, 2008, Washington Mutual (WaMu), the nation’s 

second-largest holder of payment-option ARMs, failed. Wachovia was already having 

difficulty meeting its liquidity needs, and WaMu’s failure added to existing concerns 

among Wachovia’s depositors and creditors, placing additional funding stress on the 

institution. On Friday September 26, the day after WaMu’s failure, Wachovia informed 

its lead federal supervisor, the Office of the Comptroller of the Currency (OCC), that 

it would be unable to obtain the funds needed to pay creditor claims. Wachovia also 

identified Citigroup and Wells Fargo as potential buyers. 

This situation highlighted the constraints that were placed on the FDIC’s resolution 

options when responding to the failure of a large, complex institution during a time of 

severe financial market distress. Although the FDIC had successfully resolved more than 

17 The SRE that was recommended for Bank of America (on January 15, 2009) was never formally implemented. 
xx CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

2,000 failed banks in the past, it determined that letting Wachovia fail could be highly 

problematic for the nation’s economy. Under a standard “least cost” resolution, the FDIC 

would be responsible for resolving the banking subsidiary, but the holding company 

and other subsidiaries would be resolved under bankruptcy law. Shareholders would 

likely be wiped out and creditors would suffer significant losses, in some cases leading 

directly to losses at other financial institutions. Moreover, imposing losses on Wachovia 

commercial paper held by money market mutual funds, one of which had recently 

“broken the buck” (meaning that the fund’s net asset value dropped below the desired 

and normally maintained target of one dollar per share), could have led to a general loss 

of confidence in financial institutions that might cause short-term funding markets to 

virtually cease.18 The purchase offers from both Citigroup and Wells Fargo, however, 

called for assistance that would not impose losses on Wachovia shareholders or other 

nondeposit creditors. Recognizing the risk that a least-cost resolution could amplify 

the systemic financial crisis that was then underway, the FDIC and other policymakers 

concluded it was necessary to invoke the SRE and provide assistance to debtholders and 

shareholders in addition to insured depositors. 

On September 29, the FDIC and the Federal Reserve Board (FRB) recommended 

invoking the SRE for the first time since it was created under the Federal Deposit 

Insurance Corporation Improvement Act of 1991. After consultation with the President, 

the Secretary of the Treasury concurred with this recommendation, and financial 

assistance under the SRE was approved. The FDIC Board, estimating that the Citigroup 

proposal would result in no net loss to the DIF, chose the Citigroup bid over the Wells 

Fargo bid as the least costly of the available methods for avoiding the serious adverse 

systemic effects that would have resulted from Wachovia’s failure. The Citigroup bid 

included a government guarantee on a pool of approximately $312 billion in assets. 

Citigroup and Wachovia signed a short exclusivity agreement to complete an open-bank 

acquisition with an assistance package from the FDIC. 

Shortly thereafter, however, on October 2, Wells Fargo made a new offer to acquire 

all of Wachovia’s operations. This offer required no assistance from the FDIC, and it 

provided Wachovia shareholders a higher price than the Citigroup proposal would have 

provided. This new proposal by Wells Fargo benefited from a Treasury ruling two days 

earlier that limited the tax consequences of the acquisition. Before the end of the day on 

October 2, Wachovia’s board had approved the merger with Wells Fargo. 

18 FDIC, “Memorandum to the FDIC Board of Directors Regarding Wachovia,” September 29, 2008, 

http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-09-29_Memo_to_the_FDIC_Board_of_ 

Directors.pdf. 
OVERVIEW xxi 

The successful acquisition of Wachovia negated any need for FDIC assistance, and 

no assistance was provided under the SRE. Wachovia was able to continue normal 

operations, and the projected adverse effects of a least-cost resolution were averted. 

Nevertheless, invoking the SRE set an important precedent by signaling to financial 

markets that the government was willing to take action to avert systemic problems in 

the banking industry. 

Citigroup. In 2008, Citigroup was one of the largest financial institutions in the world. 

As of September 30, 2008, Citigroup had total consolidated assets of just over $2 trillion, 

with approximately $1.2 trillion in assets in its lead bank subsidiary, Citibank, N.A. 

(Citibank). Citigroup’s vulnerability lay in its exposure to credit and market losses 

coupled with its dependence on international operations for funding.19 Citigroup had 

significant amounts of commercial paper and other debt outstanding, and it was a major 

participant in payment, clearing, and central counterparty arrangements. 

On October 9, Citigroup announced it would stop pursuing the previously announced 

acquisition of Wachovia. On October 16, Citigroup reported a net loss of $2.8 billion for 

the third quarter of 2008.20 Despite Citigroup’s receipt of substantial government support 

through broad-based Treasury, Federal Reserve, and FDIC programs such as the TARP, 

Federal Reserve lending, and the DGP, respectively, the company’s financial condition 

continued to deteriorate through early November. 

By November 20, the banking agencies and the Treasury had begun discussing 

additional, institution-specific assistance that would involve an SRE. The next day, the 

cost of insurance against a Citigroup default on its bonds more than doubled. Regulators 

projected that if deposit outflows continued, Citibank would be unable to pay its 

obligations or meet expected deposit outflows by the following week. 

The banking agencies and the Treasury agreed that the potential failure of Citigroup 

presented a serious systemic risk. On November 23, the FDIC and the FRB each 

recommended that the Secretary of the Treasury invoke the SRE to allow open-bank 

assistance for Citigroup. There was no viable acquirer for an institution with the size, 

complexity, and global operations of Citigroup. The Secretary of the Treasury, having 

consulted earlier with the President, concurred with the recommendation for an SRE. 

Late on November 23, the Treasury, the FDIC, and the FRB announced an interagency 

assistance package for Citigroup that included a $20 billion capital injection by the 

Treasury as well as loss protection on a $306 billion pool of Citigroup’s assets, backed by 

the Treasury, the FDIC, and the Federal Reserve Bank of New York. As compensation for 

19 FDIC, “Memorandum to the FDIC Board of Directors Regarding Citigroup,” November 23, 2008, http:// 

fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-11-23%20FDIC%20Board%20of%20Directors%20 

Memo%20re%20Citi.pdf. 

20 Citigroup, Inc., Third Quarter 2008 Earnings Review Presentation, October 16, 2008, http://www.citigroup. 

com/citi/investor/data/p081016a.pdf?ieNocache=975. 
xxii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

the guarantee, Citigroup issued $7 billion in stock and warrants to the Treasury and the 

FDIC. The agreement also imposed restrictions on Citigroup’s dividend payments and 

executive compensation, and requirements for loan modifications.21 

The announcement that the SRE would be invoked and government assistance 

would follow had the intended effect of stabilizing Citigroup and preventing its failure. 

Citigroup was able to continue operating, and the announcement gave the private sector 

confidence to continue providing liquidity to the company. 

Bank of America. As of September 30, 2008, Bank of America owned eight insured 

banks and four significant non-insured subsidiaries. With $1.4 trillion in total assets 

and as the largest holder of insured deposits, BofA’s largest bank subsidiary, Bank of 

America, N.A., was the second-largest bank in the United States.22 By the end of 2008, 

two of its prominent acquisitions were having a severely negative effect on the bank’s 

financial performance. In January 2008, BofA had announced its $2.5 billion acquisition 

of subprime mortgage lender Countrywide Financial, a deal that would eventually cost 

the bank much more than $2.5 billion once the full extent of Countrywide’s mortgage 

losses became evident. On September 15, 2008, BofA had announced that it would 

acquire Merrill Lynch, the weakest of the remaining major investment banks after the 

failure of Lehman Brothers (which filed for bankruptcy on that same day). Although 

BofA seriously considered renegotiating or canceling the acquisition because of larger 

than anticipated losses at Merrill Lynch, BofA ultimately completed the acquisition, 

absorbing significant losses as a result.23 

On January 9, 2009, anticipating that BofA would announce fourth-quarter results 

below market expectations during the earnings call scheduled for January 16, officials 

at the Federal Reserve and the Treasury approached the FDIC to discuss whether the 

FDIC would participate in providing government assistance to BofA beyond that already 

provided through broad-based programs in 2008. 

The banking agencies and the Treasury believed that a failure would be systemic because 

of BofA’s size and the volume of its counterparty transactions. If BofA proved unable 

to meet its obligations, the markets for short-term interbank lending, bank senior and 

subordinated debt, and derivative products, among others, could be disrupted, increasing 

the likelihood of deposit runs at banks. Moreover, given BofA’s strong reputation, the 

banking agencies and the Treasury feared that its failure could lead to a belief that wider 

21 U.S. Department of the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation, “Joint 

Statement by Treasury, Federal Reserve, and the FDIC on Citigroup,” November 23, 2008. 

22 FDIC, “Memorandum to the FDIC Board of Directors Regarding Bank of America,” January 15, 2009, 

http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2009-01-15%20Memo%20to%20the%20FDIC%20 

board%20of%20directors%20from%20Mitchell%20Glassman,%20Sandra%20Thompson,%20Arthur%20 

Murton,%20and%20John%20Thomas%20re%20Bank%20of%20America.pdf. 

23 Financial Crisis Inquiry Commission (FCIC), The Financial Crisis Inquiry Report (2011), 383. 
OVERVIEW xxiii 

problems existed in the banking industry and could significantly undermine broader 

business and consumer confidence, thus weakening the overall economy.24 

On January 15, 2009, the FDIC and the FRB each recommended that the Secretary 

of the Treasury invoke the SRE.25 The next day, the banking agencies announced an 

interagency assistance package that was very similar to the one provided to Citigroup. 

The package consisted of a capital injection by the Treasury of $20 billion through the 

TARP; $10 billion in loss protection on a pool of BofA’s assets, provided by the Treasury 

and the FDIC; and the agreement of the Federal Reserve Bank of New York to provide 

a nonrecourse loan to cover 90 percent of any losses that exceeded $21.1 billion. As 

compensation for the guarantee, the Treasury and the FDIC together would receive $4 

billion in preferred stock and warrants. The FDIC’s portion of risk would be limited in 

recognition that most of the exposures lay within the investment banking entities and 

not within Bank of America’s insured depository institutions. BofA would be subject to 

dividend and executive compensation restrictions and would be required to implement 

a mortgage loan modification program on the guaranteed assets. 

Bank of America, the FDIC, the FRB, and the Treasury began negotiating the specific 

terms of the asset guarantee portion of the package. However, in May, before the parties 

could finalize terms and before the Secretary of the Treasury formally approved an SRE, 

BofA asked to terminate the asset guarantee. In September, BofA paid $425 million to 

the government as compensation for the benefits it received from the perception that the 

government would guarantee its assets.26 Although the Secretary of the Treasury never 

formally approved an official systemic risk determination for BofA, the January 16 public 

announcement of planned assistance had nevertheless benefited the bank. 

* * * 

The announcement of each of the three SREs stabilized funding and liquidity at the 

individual institution for which it was approved and for the broader financial system. 

But the severity of the financial crisis and the extraordinary government assistance that 

followed led Congress to enact a number of financial reforms. The 2010 Dodd-Frank 

Wall Street Reform and Consumer Protection Act was intended in part to avoid a repeat 

of the need to provide taxpayer support to open financial institutions—support that has 

the effect of protecting the shareholders, creditors, and management of those institutions. 

The reforms sought to reduce not only the likelihood that systemically significant 

financial companies would fail in the future but also the adverse effects if such a failure 

did occur. Specifically, the reforms imposed higher standards for capital, liquidity, and 

24 FDIC, “Memorandum to the FDIC Board of Directors Regarding Bank of America.”
 

25 As discussed in chapter 3, the Secretary of the Treasury never made a formal SRE determination for Bank of
 

America. 

26 “Bank of America Termination Agreement,” September 21, 2009. 
xxiv CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

margin requirements on large banking organizations. The act also provided expanded 

authorities to enable the FDIC to carry out the orderly liquidation of large, complex 

financial companies. In addition, the act amended the SRE provision of the 1991 law and 

constrained the use of the exception going forward. 

Part 2: Banking Crisis and Response 

The three chapters in Part 2 examine the FDIC’s key operations—bank supervision, deposit insurance pricing and Deposit Insurance Fund management, and failed-bank resolution—before the banking crisis and in response to it. 

Chapter 4. Bank Supervision 

From the perspective of bank supervision, a good starting point for tracing the history 

of the 2008–2013 crisis is the end of the banking and thrift crisis of the 1980s and early 

1990s. Important legislative changes that were enacted during and shortly after that 

earlier crisis established new mandates for FDIC safety-and-soundness supervisors, 

and resulted in accelerated consolidation within the banking and financial industry. In 

this new landscape, banks would embark on a significant expansion of lending activity, 

particularly real estate lending, and would do so in a way that gave rise to significant new 

risks. The FDIC, in turn, would make important changes to its supervisory programs 

and its processes for assessing risk. 

One of the most important legislative changes triggered by the earlier bank crisis was 

the Federal Deposit Insurance Corporation Improvement Act of 1991, which established 

new mandates requiring the banking agencies to take prompt corrective action to resolve 

the problems of insured depository institutions at the least possible long-term loss to 

the Deposit Insurance Fund. Prominent among these Prompt Corrective Action (PCA) 

mandates was a set of restrictions that the banking agencies were either required to 

impose, or permitted to impose, on undercapitalized banks. Required or discretionary 

limitations on undercapitalized banks included dividend restrictions, requirements to 

establish a capital restoration plan, limits on growth, and other limitations. The PCA 

mandate became an important element of bank supervision before and during the recent 

crisis, and remains so today. 

Another important legislative change was the Riegle-Neal Interstate Banking and 

Branching Efficiency Act of 1994, which expanded the interstate branching and 

affiliation authorities of banking organizations, thereby accelerating the consolidation 
OVERVIEW xxv 

trend that had been underway since the mid-1980s. Finally, in 1999, the Gramm-LeachBliley Act removed most federal restrictions on affiliations between banks, investment 

banks, and insurance companies. These changes contributed to an increase in the size 

and interconnectedness of financial institutions. 

During the generally prosperous decade preceding the crisis, banks enjoyed record 

profits fueled by rapid growth in lending, particularly real estate lending. Large institutions’ 

profitability was driven in part by the origination of subprime and alternative mortgage 

products, by the creation and sale of securities backed by such mortgages, or both. Many 

smaller institutions greatly increased their holdings of, and concentrations in, loans to 

finance the acquisition, development, and construction of real estate (ADC loans). The 

rapid growth of these two asset classes—nontraditional mortgage products and ADC 

loans—was at the root of the problems that banks would experience during the crisis. 

As the banking industry’s risk profile evolved, so did the FDIC’s bank supervision 

program and its processes for analyzing risk. Most of the changes were driven by two 

broad objectives. First was a desire to learn from the experience of the 1980s and early 

1990s by focusing examinations on banks’ risk management practices and the timely 

correction of deficiencies where those existed. The FDIC made organizational changes 

and other efforts to improve the quality of its risk analysis capabilities and its expertise 

regarding more-complex banking activities, and in particular its understanding of risks 

posed by the largest banking organizations. The second broad objective driving changes 

in bank supervision during the inter-crisis years was the desire to reduce the burden 

associated with examinations for small banks believed to have a low risk profile. The 

FDIC’s commitment to this objective was reflected in reductions in the number of hours 

and the staffing that were devoted to examinations, and in the streamlined examination 

procedures used for many small banks. 

The stresses that led to the crisis first appeared in the summer of 2006, when the CaseShiller national index of home prices began what would be a nearly six-year decline, losing 

27 percent of its value over that period. In 2008, concerns about the value of mortgagerelated assets were the main cause of the liquidity crisis experienced by many large 

financial institutions. For smaller banks, the effects of a declining housing market and the 

accompanying recession were gradual at first, but in 2009 and 2010 the number of failed 

and problem banks—most of them under $10 billion in asset size—increased exponentially. 

In all, 489 FDIC-insured banks failed during the crisis years 2008 through 2013. Typical 

characteristics of the banks that failed included heightened concentrations of ADC 

lending, rapid asset growth, heightened reliance on funding sources other than stable 

core deposits, and relatively lower capital-to-asset ratios. In addition, banks chartered in 

2000 or after failed at substantially higher rates than banks chartered before 2000. 

The factors contributing to bank failures in the crisis and to the resulting losses to the 

DIF were documented by Material Loss Reviews (MLRs) conducted by the FDIC Office 

of Inspector General (OIG). Mandated by Section 38 of the Federal Deposit Insurance 
xxvi CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Act, MLRs are undertaken for failed banks that imposed losses on the DIF of at least $50 

million.27 These audits have two objectives: (1) to determine the causes of the failure and 

the resulting material loss to the DIF, and (2) to evaluate the FDIC’s supervision of the 

institutions, including the FDIC’s implementation of the requirements of PCA. Reviews 

of crisis-era failures documented the decisive role played by bank governance—including 

the quality of a bank’s loan underwriting and credit administration, its risk limits, and 

its internal controls—in determining the risk profile of the bank and its susceptibility to 

fraud or insider abuse. The reviews also highlighted the importance of on-site examination 

in evaluating a bank’s internal risk management practices and requiring corrective action 

when needed. The OIG has also reported that surviving banks were more likely to have 

been responsive to such recommendations for corrective action.28 

In fact, the FDIC’s bank examiners and supervisors made significant efforts during 

the crisis to work with troubled banks to help them return to health. Given the rapidly 

deteriorating conditions facing the banking industry, however, deploying sufficient 

examination resources to ensure the FDIC had accurately identified the institutions most at 

risk became a challenge. One way the FDIC addressed this challenge was by supplementing 

the examination force with employees who were hired for a time-limited term. Many of 

these term employees had substantial experience in bank supervision. By 2010, 494 term 

employees hired to assist with safety-and-soundness examinations were on board at the 

FDIC. More than 75 percent of them were loan review specialists; others were specialists in 

investigations, information technology, and the Bank Secrecy Act/Anti-Money Laundering. 

Some of the term employees were retired FDIC employees, who were rehired under a 

special authority granted by the federal Office of Personnel Management. Some of these 

rehired individuals were able to pass along the benefit of their extensive examination and 

bank supervision experience by helping with the training of pre-commissioned examiners. 

For institutions whose quarterly financial reports suggested potential problems, waiting 

as long as 24 to 36 months for the next scheduled FDIC examination was not a feasible 

supervisory strategy. For such institutions where an examination was not already scheduled 

in the near term, the FDIC often conducted a visitation focused on asset quality. These 

visitations frequently resulted in downgrades to examination ratings and the establishment 

of corrective action plans.29 Formal and informal enforcement actions, and in some cases 

letters provided to a bank’s board of directors at the conclusion of the examination, clearly 

communicated the steps needed to address the problems of troubled institutions. 

27 This threshold for requiring an MLR was established as of January 1, 2014. 

28 FDIC Office of Inspector General, “Acquisition, Development and Construction Loan Concentration Study,” 

Office of Audits and Evaluations Report no. EVAL-13-001, 2013. 

29 The FDIC (and the other federal banking agencies) assigns ratings to banks at the conclusion of a safety-andsoundness examination. The ratings are on a scale of 1 to 5, with “1” being the best and “5” the worst. The 

rating and the report of examination convey to bank management the FDIC’s view of the condition of the 

bank and the corrective actions, if any, that the bank needs to undertake. 
OVERVIEW xxvii 

New institutions were disproportionally represented among troubled banks. New 

institutions typically operate with losses during their first few years of operation as they 

build up their business, and are more vulnerable to an economic downturn. In addition, 

during the pre-crisis period some of these institutions significantly departed from the 

business plans that were the basis for their approved deposit insurance applications, 

thereby increasing their risk profile and making the likelihood of failure greater. To address 

the risks at these institutions, the FDIC lengthened the period—going from three years 

to seven years—during which new institutions would be subject to heightened oversight, 

including review and approval of their business plans and annual examinations. 

Holding-company structures sometimes posed special issues. For some insuredbank subsidiaries of holding companies, heightened supervisory vigilance was needed 

to insulate the bank from its affiliates. The liability structure of many bank holding 

companies sometimes made it difficult for them to raise capital when it was most needed. 

In a number of instances, however, the sale and full recovery of insured banks occurred 

even as their parent holding company entered bankruptcy. The FDIC’s ability to require 

banks in a holding company to reimburse the FDIC for some or all of the cost of failures 

of affiliated banks was helpful in reducing failure costs, and in fact the FDIC’s ability to 

require such reimbursement gave financial incentives to troubled institutions to raise 

capital or find merger partners to avoid failures. 

During the course of the crisis, several private equity investors expressed an interest in 

purchasing or investing in failed banks. In 2009, the FDIC’s Board of Directors adopted 

a Statement of Policy (SOP) to provide guidance about such acquisitions or investments. 

Supervision staff determined the readiness of proposed ownership groups in relation 

to the statutory requirements for deposit insurance, and if the purchase or investment 

went ahead, supervision staff evaluated the activities of the institutions relative to the 

principles contained in the SOP. 

The FDIC’s supervisory efforts during the crisis made a beneficial difference to the 

ultimate outcomes for troubled banks. The FDIC identifies “problem banks” as those 

with examination ratings of 4 or 5—the two lowest ratings, which refer to institutions that 

exhibit deficiencies in practices or performance so severe that failure is either a distinct 

possibility (4 rating) or likely (5 rating) unless the deficiencies are corrected. Historically 

as well as in this crisis, most problem banks have not failed. Instead, a substantial majority 

have taken the steps needed to address their problems and have survived or been acquired 

without FDIC assistance. Between January 1, 2008, and March 31, 2017, 1,783 insured 

depository institutions were designated as problem institutions at one time or another. By 

the end of this period, 523 had failed; 112 remained in problem status; 294 had merged 

with other institutions without FDIC assistance; and 854 were no longer problem banks. 

Nonetheless, as the FDIC concluded through self-assessments and the results of 

MLRs, the supervisory response to the risks building up at banks during the pre-crisis 

years should have been more forceful. For many banks that failed during the crisis, FDIC 
xxviii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

examiners drew attention to the risk management deficiencies or issues that ultimately led to 

the bank’s failure, often well before the failure. Recommendations to address the deficiencies 

typically were included in the examination report that was transmitted to the bank. 

However, not until the bank’s financial condition deteriorated did those recommendations 

translate to rating downgrades or enforcement actions. The FDIC has taken a number of 

steps to ensure that this lesson is incorporated into day-to-day bank supervision, including 

training examiners in the importance of proactive supervision to address deficiencies in 

risk management at an early stage, providing for a more comprehensive analysis of a bank’s 

credit and funding concentrations in reports of examination, and improving guidance to 

FDIC bank supervision staff on matters requiring attention by banks’ boards of directors. 

A number of lessons for bank supervisors suggest themselves in light of the crisis. First, 

prosperous times can mask a building up of significant risks in banking. Before the crisis, 

a nationwide collapse in housing prices was viewed by most observers as highly unlikely, 

in part because such a thing had not happened in many decades. This suggests a second 

lesson, that past performance is not a guide to future performance—and therefore that 

bank supervisors must guard against complacency. 

The crisis demonstrated that the choices banks made during the pre-crisis years about 

how aggressively to pursue earnings growth had significant consequences. The rapid 

onset of the crisis after years of record-breaking bank earnings was a reminder that higher 

returns are achieved only by taking higher risks. In this respect, the crisis illustrated that 

key financial metrics, such as rapid growth or concentrations in riskier loan categories 

or potentially volatile funding sources, can give indications about which banks are taking 

more risks, and that these metrics warrant serious consideration by bank supervisors. 

There also are lessons to be learned from the crisis about the importance of risk 

management in banks, of the examination process in reviewing banks’ operations, and 

of bank supervisors’ response to identified risks. One such lesson is that the quality of 

banks’ internal controls and management of risks drove outcomes at individual banks. 

Given the importance of how banks are managed, another key lesson is that only on-site 

examinations can provide enough information for bank supervisors to evaluate the safety 

and soundness of an insured depository institution and the adequacy of its practices for 

managing risk. And, as just suggested, a central lesson of the crisis is that supervisors 

should require corrective action when a bank’s risk management is deficient. 

Finally, the crisis served as a reminder of the importance of certain programmatic 

aspects of bank supervision. First, new banks require extra supervisory attention, because 

they typically operate with losses during their early years as they build their business, and 

consequently they are more susceptible to downturns. Second, large banks require extra 

supervisory attention because of the generally greater complexity of their operations and 

the outsized risks they can pose to the Deposit Insurance Fund and the U.S. economy. Third, 

changes to the supervision program itself should be managed carefully and incrementally, 

to promote the steady focus required for effective supervision. Last, and perhaps above all, 
OVERVIEW xxix 

bank supervision and examination require expertise. The FDIC’s seasoned examination 

and supervision staff played an important part in the success of its response to the crisis. 

This experience therefore highlights the ongoing importance of the hiring and training 

of new examiners, and of efforts to ensure they can benefit from the knowledge and 

experience of those who came before them. 

Chapter 5. Deposit Insurance: Fund Management and Risk-Based 

Deposit Insurance Assessments 

The FDIC manages the Deposit Insurance Fund (DIF, or the fund) by determining the 

proper size of the fund and of the DIF reserve ratio (the ratio of the fund balance to 

estimated insured deposits), and setting the overall range of assessment rates needed to 

achieve that size. Within this range of assessment rates, the FDIC charges banks different 

rates for the differing risks they pose to the fund. The banking crisis severely depleted 

the fund, quickly sending it more than $20 billion into the red and requiring the FDIC to 

respond to the difficulties this entailed. 

The FDIC’s strategies for managing the fund (including ensuring that it has sufficient 

liquid assets to protect insured depositors at failed banks) and for setting risk-based 

assessment rates changed greatly between 2006 and 2016. After a decade of statutory 

restrictions on the FDIC’s authority to manage the fund and charge assessments based 

on risk, in 2006—on the eve of the banking crisis—the agency took advantage of greater 

statutory latitude to revise the risk-based assessment system, and the advent of the 

banking crisis led the FDIC to make adaptive changes in its fund management strategy. 

The deposit insurance reforms authorized by the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (Dodd-Frank) and the lessons learned during the 

banking crisis have allowed the FDIC to substantially revamp its approach both to fund 

management and to risk-based assessments. 

Leading Up to the Crisis (1996–2007). As late as March 2008, the DIF balance stood at a 

historic high of $52.8 billion. Yet for much of the previous decade, statutory constraints on 

the FDIC’s authority to assess most banks had served to limit growth in the DIF reserve 

ratio, despite few bank failures. The Federal Deposit Insurance Reform Act of 2005 restored 

the FDIC’s authority to assess all insured institutions, giving the FDIC greater discretion to 

manage the size of the fund. As a result, in 2007 the FDIC began charging premiums to all 

banks using updated risk-based pricing methods that, for the first time, included separate 

assessment methods for small banks and large banks. At the end of 2007, however, the fund 

reserve ratio was relatively unchanged compared with a year earlier because of a statutory 

requirement that the FDIC provide credits to offset the premiums of many banks that had 

helped rebuild the insurance funds in the early to middle 1990s. 
xxx CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Responding to the Crisis (2008–2009). In the second quarter of 2008, the DIF reserve 

ratio dropped below the statutory minimum of 1.15 percent of estimated insured deposits. 

It continued to decline precipitously as the number of banks that were failing or were in 

danger of failing climbed to levels unseen since the bank and thrift crisis of the late 1980s 

and early 1990s. In October 2008, as required by statute, the FDIC adopted a restoration 

plan that increased assessment rates for all banks at the start of 2009 in an effort to raise 

the reserve ratio to 1.15 percent within five years. In the ensuing months, the enormous 

stresses on financial institutions prompted the FDIC to twice extend the time frame of 

the plan (ultimately, to eight years) and impose a one-time special assessment on all 

banks. Instead of imposing a special assessment, the FDIC could have borrowed from 

the Treasury, which it had done in the early 1990s during the bank and thrift crisis, but it 

chose not to borrow. Borrowing would not have helped maintain a positive fund balance, 

or net worth, whereas a special assessment would. 

Despite higher assessment rates and the special assessment, mounting losses from 

actual failures as well as reserves set aside for anticipated failures caused the fund balance 

to fall below zero in the second half of 2009 and hit a low point of negative $20.9 billion 

by the end of the year. 

With the rise in actual and projected failures, by September 2009 the DIF’s liquidity 

needs threatened to exceed its liquid assets as early as 2010. If this potential squeeze 

on the liquid assets of the DIF were not addressed, it threatened to compromise the 

FDIC’s ability to pay depositors promptly. To address this issue, the FDIC adopted a 

novel approach that required the banking industry to prepay its quarterly risk-based 

assessments for the fourth quarter of 2009 and for the next three years. In contrast to a 

special assessment, a prepaid assessment did not impair bank earnings and capital under 

applicable accounting rules. The prepayment was counted on the banks’ balance sheets 

as an asset that was reduced each quarter as each prepaid assessment came due. 

Because banks were holding significant amounts of cash at the time, the FDIC believed 

that most of the prepayments would be drawn from banks’ available cash and excess 

reserves at the Federal Reserve without significantly affecting banks’ lending activities. 

This approach not only generated sufficient liquidity for the DIF to weather the crisis, 

but it also earned widespread banking industry support. Again, the FDIC had decided 

not to use its authority to borrow from the Treasury to meet liquidity needs. Prepaid 

assessments ensured that the DIF remained directly industry funded; and prepayments, 

unlike Treasury borrowing, accrued no interest. 

During the crisis, the FDIC also made several changes in the framework for risk-based 

assessments. Among these changes were several adjustments to a bank’s assessment rate 

based on the bank’s holdings of secured liabilities, brokered deposits, and unsecured 

debt. These adjustments were intended to account for liabilities that would increase or 

decrease losses to the fund if a bank failed. 
OVERVIEW xxxi 

Post-Crisis Reforms (2010–2016). The Dodd-Frank Act, enacted in 2010, raised the 

minimum reserve ratio to 1.35 percent but extended the time frame to reach the new 

minimum until September 30, 2020. Dodd-Frank also expanded the FDIC’s authority 

to manage the fund. This expanded authority enabled the FDIC to adopt, in 2010, a 

comprehensive, long-term DIF management plan that would make the fund more likely 

to be able to withstand a future crisis. To implement the plan, the FDIC suspended 

dividends indefinitely (as allowed by Dodd-Frank) and set the target reserve ratio at 

2 percent—consistent with what the agency estimated would have been required to 

maintain both a positive balance and stable assessment rates from 1950 through 2010. 

Pursuant to the plan, the FDIC set overall assessment rates at a level that would remain 

moderate and steady throughout economic and credit cycles, thus reducing pro-cyclical 

volatility (i.e., reducing the need to charge the most during periods of crisis, when banks 

can least afford to pay). In lieu of dividends, overall assessment rates will decrease once 

the reserve ratio reaches its 2 percent target. 

Dodd-Frank included provisions designed to reallocate between small and large 

banks the costs of supporting the DIF. First, it redefined the assessment base from 

domestic deposits to average consolidated total assets minus average tangible equity. 

This redefinition decreased the proportion of total assessments paid by small banks and 

increased the proportion paid by large banks, since smaller banks typically fund more of 

their assets with domestic deposits than do larger banks. Second, Dodd-Frank required 

that the FDIC, when setting assessments, offset the effect on small banks of increasing 

the minimum reserve ratio to 1.35 percent. The FDIC implemented this requirement by 

imposing quarterly surcharges on banks over $10 billion in assets once the reserve ratio 

reached 1.15 percent—to close the remaining gap to the 1.35 percent minimum—and 

crediting small banks for the portion of their regular assessments that was used to meet 

the new minimum level. 

In another change, this one independent of Dodd-Frank, the FDIC updated its riskbased pricing methods, incorporating data and experiences from the banking crisis 

to better estimate the risks that banks pose to the DIF. Specifically, the revised pricing 

methodology for large banks uses supervisory ratings and updated financial measures 

to predict performance during periods of stress, along with the relative magnitude of 

losses in the event of a failure. The revised methodology for established small banks 

uses supervisory ratings and updated financial measures to estimate the probability of 

failure over three years. Both methodologies rely heavily on data obtained during the 

crisis, and backtesting shows that they would have performed significantly better than 

the methodologies they replaced. 

In the wake of this crisis (the second banking crisis since 1980), the financial reforms 

of 2010 provided the FDIC with new authorities allowing the agency to institute a longterm fund management plan designed to (1) reduce the pro-cyclical effect of deposit 

insurance assessments, and (2) maintain a positive fund balance even when many banks 
xxxii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

fail. Implementation of the long-term plan will make assessment costs predictable for 

banks and will improve public confidence in the banking system. 

Chapter 6. Bank Resolutions and Receiverships 

After more than a decade of modest failure activity, the financial crisis of 2008 resulted in 

489 bank failures from 2008 through 2013. Among the failures was Washington Mutual, 

a $307 billion institution that was (and remains) the largest failure in the history of 

the FDIC. Because failed-bank resolution is an important way that the FDIC fulfills its 

mission “to maintain stability and public confidence in the nation’s financial system”30 

and because the choices and processes associated with bank resolution have profound 

effects on the DIF’s losses, bank customers, and the local economy, the FDIC focused a 

great deal of energy on this task. Despite challenges, the FDIC accomplished its primary 

resolution and receivership responsibilities: to protect all insured depositors at failed 

banks and to meet statutory mandates. 

Before the crisis, the FDIC undertook several initiatives to prepare for a potential 

increase in bank failures. These initiatives included readiness exercises, large-bank 

resolution simulations, rulemaking to clarify bank closing processes and provide timely 

access to critical information about failing banks, and enhancements to the FDIC’s IT 

systems and business processes. Although many of these initiatives were helpful, they were 

not fully successful, for two reasons. First, the crisis was greater than anticipated and— 

importantly—unfolded more quickly than anticipated. Second, the FDIC was shorthanded 

during the early phase of the crisis, and from 2008 to 2010 some scarce resources were 

necessarily diverted from resolution activities to infrastructure development.31 

As the scale of the crisis became clear, however, the FDIC Division of Resolutions and 

Receiverships (DRR) took a number of steps to quickly ramp up its staffing. Before mid2008, authorized DRR staff numbered just 227, but by the end of 2010 the number of 

positions exceeded 2,100. A key element of this staff expansion was a heavy reliance on 

temporary employees, who constituted more than 80 percent of DRR employees in 2011. 

A few of these temporary employees were veterans of the bank and thrift crisis of 1980 

through 1994 and were therefore highly experienced. Much as the FDIC had relied on 

consolidated offices (that is, field offices located where there were a lot of failed banks) 

in the 1980–1994 crisis, in the recent crisis the FDIC established temporary satellite 

offices (TSOs) in California, Florida, and Illinois. The TSOs placed resources for bank 

resolution and asset disposition closer to where most of the failures took place, helping to 

improve communication with the parties involved and to minimize travel costs. 

30 See https://www.fdic.gov/about/strategic/strategic/mission.html for the FDIC’s mission, vision, and values. 

31 Infrastructure development included hiring staff, opening new offices, developing and updating contracts, 

and developing and updating IT systems. 
OVERVIEW xxxiii 

The FDIC had several options for resolving failed banks, including a payout and a 

variety of purchase and assumption (P&A) agreements.32 The FDIC marketed the failedbank franchises (that is, the operating units of the failed banks) to healthy, well-run 

institutions, seeking acquirers that would take over some or all of the failed banks’ assets 

and deposits. If a potential acquirer submitted a bid that met the FDIC’s criteria, a P&A 

agreement was chosen; otherwise, the FDIC executed a payout. 

The FDIC made choices about the best P&A transactions to offer potential acquirers 

in light of multiple constraints and trade-offs. Some of the key constraints were statutory 

requirements about the prompt closure of failed banks and cost-effective resolution. 

Some of the key trade-offs involved DIF capital losses, the DIF cash position, potential 

disruption to bank customers and local markets, FDIC staffing requirements, and the 

financial and operational risks imposed on the FDIC. During the 1980–1994 crisis the 

FDIC and the Resolution Trust Corporation (RTC) had retained and managed a large 

volume of failed-bank assets—an undertaking that proved to be costly and operationally 

complex. Based on this experience, the FDIC sought to return assets to the private sector 

quickly. Therefore, the FDIC tried whenever possible to offer P&A transactions that 

would allow a large volume of assets to be sold to acquirers on the same day that the 

bank failed. As the crisis evolved, the FDIC refined and adjusted its offerings in light of 

changes in market conditions and feedback from potential acquirers. 

During the 2008–2013 crisis, the FDIC’s primary offering to potential acquirers of 

failed banks was a P&A agreement where the FDIC agreed to share losses on loans and 

real estate.33 In most cases, the FDIC’s share of the loss was 80 percent, and the acquiring 

bank would absorb the remaining 20 percent of losses. The FDIC sold 304 (62 percent) 

of the failed banks using this strategy. 

Although the marketing of failed-bank franchises was an important component of the 

FDIC’s resolution activities, it was just the first step in the receivership process that wound 

up the affairs of the failed banks. The FDIC’s receivership responsibilities were broad, and 

included liquidating all the failed banks’ assets and addressing all the claims against the 

failed banks. The FDIC managed $87.5 billion in assets that were retained in receiverships 

(because they were not acquired under a P&A transaction) and as of year-end 2016, it 

had liquidated all but $3.2 billion of the assets. Most of the assets were liquidated using 

cash sales, securitizations, and joint ventures that were structured as Limited Liability 

Companies (LLCs). The FDIC also identified valid claims against the receiverships, and 

used the funds that the receiverships collected to pay receivership claims as required by 

32 In a payout, the FDIC pays insured depositors directly and sells the failed bank’s assets to recover its costs 

and satisfy other legitimate claims of the receivership. In a P&A, a healthy bank (called the acquirer) 

purchases some or all of the failed bank’s assets and assumes some or all of the failed bank’s liabilities. 

33 Principal losses and certain types of expenses were covered. In a few cases, certain securities were 

also covered. Coverage was excluded for consumer loans at many banks, and for single-family loans at 

some banks. 
xxxiv CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

statute. In addition, the FDIC administered the loss-share and LLC contracts to protect 

its interests and ensure that acquirers and LLC partners met their responsibilities under 

these risk-sharing arrangements. The FDIC relied heavily on contractors to manage the 

receiverships, service the loans retained in receivership, and sell the assets. 

During the crisis, the FDIC learned several lessons related to its resolution and 

receivership function. First, because the FDIC’s mission requires prompt action during 

periods of financial crisis and because every financial crisis is unique and can unfold 

quickly, robust readiness planning—which includes adequate staff levels, contracts 

for critical services, scalable IT systems, and roadmaps for staff and infrastructure 

expansion—is important at all times. Because national servicers are especially beneficial 

during large-scale crises, readiness plans should consider them as well. 

Second, loss-share resolutions allowed the FDIC to sell assets promptly during the 

crisis and also benefit from subsequent price improvements. They allowed for asset 

management by private-sector institutions, conserved DIF cash, minimized FDIC staff 

needs, and reduced disruption to bank customers and local communities. 

Third, the FDIC’s use of structured contracts (securitizations and LLCs) as a means to 

sell assets held in receivership worked well. By retaining some or all of the risk from these 

asset sales, the FDIC received better prices than it would have received if the assets had 

been sold outright using cash sales at the time of failure, and the FDIC benefited from 

subsequent improvements in asset market values. 

Finally, because of the FDIC’s exposure to risk from the loss-share program, careful 

oversight of the loss-share agreements was important. 

Good information and a well-informed staff are invaluable when a crisis erupts. There 

may be opportunities to conduct research, or leverage the research of other parties, to 

improve the FDIC’s ability to make good decisions during crisis periods. One area that 

merits attention is the trade-offs involved in resolving failed banks (minimizing costs; 

minimizing disruption from failures; minimizing the FDIC’s liquidity needs, operational 

risk, and financial risk; and encouraging market discipline). Other topics for further 

research include the costs and benefits associated with prompt asset sales; the use and 

design of risk-sharing contracts; the potential development of early-warning tools that 

might be used to trigger readiness plans for resolutions and receiverships; and the effects 

of market power wielded by asset buyers during distress periods when there are only a 

few potential buyers, as well as options for mitigating the adverse effects of that market 

power. Finally, it would be beneficial to examine options for expanding seller financing 

as a way to improve asset sale prices. 
OVERVIEW xxxv 

Conclusion
 

The financial crisis of 2008 through 2009 and the banking crisis of 2008 through 2013 

presented the FDIC with unprecedented challenges. The systemic threat posed by the 

financial crisis demanded creative and innovative responses from the FDIC and other 

financial regulatory agencies, while the speed and severity of the banking crisis stretched 

to the limit the FDIC’s capacity to supervise problem institutions, manage the Deposit 

Insurance Fund, and implement orderly resolutions for failed financial institutions. 

There are many lessons to be learned from the FDIC’s experience. The purpose of this 

volume is to clearly describe that experience for the public record, and to allow others to 

evaluate and gain insight from that history. 

Postscript: The Banking Industry in 2017 

As this history is being written, the U.S. banking industry has put the crisis behind it 

and is in a position of strength. As of June 30, 2017, there were 105 banks on the FDIC’s 

problem bank list, the lowest quarter-end number since March 31, 2008, when there 

were 90. Noncurrent loans for insured banks were at the lowest level as a percentage of 

loans since the third quarter of 2007. Insured banks earned a record $48.3 billion in the 

second quarter of 2017. Earnings were at their highest level relative to average assets 

since the second quarter of 2007. At the same time, insured banks are supporting the 

credit needs of the U.S. economy. Annualized loan growth at U.S. banks during the three 

years 2014–2016 averaged 5.7 percent—outpacing nominal GDP growth in each year. 

Particularly noteworthy for the safety and soundness of the banking industry and 

for financial stability more generally is the fact that large banking organizations have 

substantially more capital and liquidity than they had entering the crisis. Bank holding 

companies with assets greater than $250 billion have about twice the capital and more 

than twice the liquid assets relative to their asset size than they had entering the crisis. The 

tier 1 leverage ratio of these institutions increased from 4.46 percent at year-end 2007 to 

9.01 percent at mid-2017, while their ratio of liquid assets to total assets increased from 

about 8.6 percent to 22.6 percent during the same period.34 The improved capital and 

liquidity of these institutions is largely attributable to capital and liquidity regulations the 

federal banking agencies issued in response to the crisis. 

In addition, there is now in place an enhanced FDIC capability to manage the orderly 

failure of a systemically important financial institution without taxpayer support. 

34 “Liquid assets” for purposes of this discussion refers to cash, federal funds sold, Treasury securities, agency 

debt securities, and agency mortgage-backed securities. 
xxxvi CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The improved condition of the banking industry should not be a cause for complacency, 

however. The build-up of risk during the pre-crisis years documented in this history 

should be a reminder to banks and their regulators of the risks that can develop during 

a period of banking industry prosperity. As the current business cycle has progressed, 

more banks have reduced their liquid asset holdings while taking on more credit risk in 

their loan portfolios, with some banks financing loan growth with a greater proportion 

of potentially volatile funding sources. In the event of a sustained increase in interest 

rates, some banks could be faced with declines in the values of their holdings of longterm bonds and mortgages or with increased funding costs, or both. Other risks include 

those from large derivatives exposures, developments in foreign banking and financial 

systems, and potential cyber-events. 

As we learned during the crisis, a safe and sound banking industry is essential to the 

successful functioning of a nation’s economy, but it cannot be taken for granted. We 

also learned how quickly and unexpectedly conditions can change. It is striking how 

much progress has been made since the crisis years of 2008–2013 in fostering a strong 

U.S. banking industry that supports our economy. Preserving these gains will require 

continued vigilance on the part of bank regulators. 
OVERVIEW xxxvii 

Crisis and Response Timeline 

2007 

February 

Feb. 27, 2007 The Federal Home Loan Mortgage Corporation (Freddie 

Mac) announces that it will no longer buy the most risky 

subprime mortgages and mortgage-related securities. 

April 

Apr.2, 2007 New Century Financial Corporation, a leading subprime 

mortgage lender, files for bankruptcy. 

February 

Feb. 17, 2008 Northern Rock is taken into state ownership by the 

Treasury of the United Kingdom. 

March 

Mar. 14, 2008 JPMorgan Chase acquires Bear Stearns with government 

assistance. 

Mar. 16, 2008 The Federal Reserve creates the Primary Dealer Credit 

Facility to aid market liquidity. 

July 

July 11, 2008 IndyMac Bank fails. 

September 

Sept. 7, 2008 The Federal Housing Finance Agency (FHFA) 

places Fannie Mae and Freddie Mac in government 

conservatorship. 

Sept. 15, 2008 Lehman Brothers Holdings Inc. files for Chapter 11 

bankruptcy protection. 

Bank of America announces its intent to purchase Merrill 

Lynch & Co. 

Sept. 16, 2008 AIG obtains $85 billion under a temporary liquidity 

facility from the Federal Reserve. 

The Reserve Primary Fund, a large money market fund, 

announces it “broke the buck.” 

Sept. 19, 2008 U.S. Treasury temporarily guarantees money market 

funds against losses up to $50 billion. 

Sept. 21, 2008 Goldman Sachs and Morgan Stanley become bank 

holding companies. 

Sept. 25, 2008 Washington Mutual Bank fails and JPMorgan Chase 

acquires its deposits and assets. 

Sept. 29, 2008 Systemic Risk Exception (SRE) is recommended and 

approved for Citigroup to acquire Wachovia. Citigroup/ 

Wachovia deal is announced but never completed. 

October 

Oct. 3, 2008 The Emergency Economic Stabilization Act of 2008 

authorizes the $700 billion Temporary Asset Relief 

Program (TARP) and temporarily increases deposit 

insurance coverage to $250,000. 

Wells Fargo announces its acquisition of Wachovia. 

2008 
xxxviii CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

October 

November 

December 

2009 

January 

May 

June 

September 

October 

December 

2010 

June 

July 

Oct. 14, 2008 

Nov. 23, 2008 

Dec. 31, 2008 

Jan. 1, 2009 

Jan. 16, 2009 

May 7, 2009
 

June 30, 2009
 

Sept. 1, 2009
 

Sept. 21, 2009
 

Sept. 30, 2009
 

Oct. 31, 2009
 

Dec. 30, 2009
 

Dec. 31, 2009
 

June 28, 2010
 

July 21, 2010
 

The FDIC announces SRE for the Temporary Liquidity
 

Guarantee Program (TLGP) and creates the Debt
 

Guarantee Program (DGP) and the Transaction Account
 

Guarantee Program (TAGP).
 

The Federal Reserve announces the Commercial Paper
 

Funding Facility (CPFF).
 

The U.S. Treasury Department announces the Capital
 

Purchase Program (CPP) under TARP.
 

SRE is recommended and approved to provide assistance
 

to Citigroup, and the U.S. Treasury provides capital
 

investment via TARP.
 

By year-end, 25 insured depository institutions (IDIs) fail,
 

and at year-end the number of problem IDIs has risen to
 

252, up from 76 at year-end 2007.
 

FDIC implements a 7 basis point increase in deposit
 

insurance assessment rates.
 

Bank of America announces the completed acquisition of
 

Merrill Lynch.
 

SRE is recommended and approved to provide assistance
 

to Bank of America, and the U.S. Treasury provides
 

capital investment via TARP.
 

Stress tests of 19 largest BHCs completed.
 

The FDIC announces a special assessment of $5.5 billion;
 

this will temporarily boost the DIF balance.
 

The FDIC extends the TAGP, scheduled to expire in
 

December, to June 30, 2010.
 

Bank of America terminates the SRE assistance
 

agreement.
 

The DIF balance and reserve ratio become negative.
 

The DGP expires.
 

$45.7 billion prepaid assessment strengthens DIF
 

portfolio liquidity.
 

By year-end, 140 IDIs fail, and at year-end the number of
 

problem IDIs has risen to 702.
 

The FDIC extends the TAGP to December 31, 2010, when
 

the program ends.
 

The Dodd-Frank Wall Street Reform and Consumer
 

Protection Act of 2010 is enacted.
 
OVERVIEW xxxix 

December 

2011 

June 

December 

2012 

December 

2013 

January 

Dec. 20, 2010 

Dec. 31, 2010 

June 30, 2011 

Dec. 31, 2011 

Dec. 31, 2012 

Jan. 1, 2013 

Dec. 31, 2013 

The FDIC Board sets the Designated Reserve Ratio 

at 2 percent for the year 2011 (where it remained 

through 2017). 

By year-end, 157 IDIs fail, the most of any year during 

the crisis. At year-end, the number of problem IDIs has 

risen to 884. 

The DIF balance and reserve ratio turn positive. 

By year-end, 92 IDIs fail and the number of problem 

IDIs at year-end has dropped slightly from the year 

before, to 813. 

By year-end, 51 IDIs fail, a third the number that failed 

in 2010. The number of problem IDIs at year-end has 

dropped to 651. 

There is no longer any outstanding debt guaranteed by 

the FDIC’s DGP. 

By year-end, just 24 IDIs fail, one fewer than during the 

first year of the banking crisis. At year-end, the number of 

problem IDIs has dropped to 467. The number of failures 

and problem institutions continue to drop through 2016. 

December 

Sources: FDIC and Federal Reserve Bank of St. Louis, Financial Crisis Timeline, https://www.stlouisfed.org/ 

Financial-Crisis. 
xl CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
Part 1: 


Financial Crisis and Response
 
2 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
1
 

Origins of the Crisis 

Overview 

The U.S. financial crisis of 2008 followed a boom and bust cycle in the housing market 

that originated several years earlier and exposed vulnerabilities in the financial system. As 

is typical of boom and bust cycles, this boom was characterized by loose credit, rampant 

speculation, and general exuberance in the outlook for the market—in this instance, the 

housing market. The subsequent downturn began as a housing crisis that initially seemed 

to be concentrated in certain states and in the subprime mortgage market. Eventually, 

however, the seemingly circumscribed housing collapse spread to the entire U.S. housing 

market, as house prices declined nationwide. And because the financial system had 

been integral to the housing boom, it was highly exposed to the housing market, whose 

downturn would prove to be so severe that it threatened to drag down the financial 

system with it in the absence of significant government intervention. Inexorably, the 

collapse of the U.S. housing market in 2007 became the most severe financial crisis since 

the Great Depression, and the financial crisis, in turn, resulted in a protracted economic 

contraction—the Great Recession—whose effects spread throughout the global economy. 

The nationwide housing expansion of the early 2000s was rooted in a combination 

of factors, including a prolonged period of low interest rates. By mid-2003, both longterm mortgage rates and the federal funds rate had declined to levels not seen in at least 

a generation. One response to low interest rates was an acceleration in U.S. home price 

appreciation to double-digit rates for the first time since 1980. Another response was a 

series of mortgage market developments that dramatically weakened credit standards 

in mortgage lending. These market developments were associated with a glut of savings 

held by global institutional investors seeking high-quality and high-yield assets; loose 

underwriting standards; a complex and opaque securitization process; the use of poorly 

understood derivative products; and speculation based on the presumption that housing 

prices would continue to increase. 

Other factors were in play as well in the years leading up to and during the housing 

market expansion. Financial innovation and deregulation contributed to an environment 

in which the U.S. and global financial systems became far more concentrated, more 

interconnected, and, in retrospect, far less stable than in previous decades. These factors 
4 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

and the ones mentioned in the preceding paragraph helped fuel a housing boom while also 

making the U.S. financial system more vulnerable to collapse in times of stress. 

One set of key players in fueling the boom was real estate investors. Attracted by the 

expectation of future house price appreciation and the availability of cheap credit, many real 

estate investors entered the housing market,1

 motivated to buy and re-sell homes to make 

short-term gains. Investors’ speculative behavior contributed to the striking house price 

appreciation, which in turn spurred potential homebuyers to act before prices increased 

further. In the end, when house prices collapsed, many of these real estate investors realized 

losses and many homeowners lost their homes. 

Also fueling the boom was the role mortgage companies played in the steady rise of house 

prices. Mortgage credit was cheap, so when high house prices limited the pool of low-risk 

borrowers who could qualify for conventional mortgages, mortgage lenders expanded the 

group of potential borrowers by offering new and innovative mortgage products designed 

to reach less-creditworthy borrowers. However, many of these borrowers became the 

targets of predatory lending practices that placed borrowers into mortgage products that 

would eventually create financial hardship for them, as they ended up building debt rather 

than wealth, either through repeat refinancings that took equity from homes or through 

adjustable rate features that challenged their repayment abilities. 

The housing boom was fueled, as well, by the financialization of housing assets: illiquid 

real estate (housing) was turned into a financial asset that could be traded more easily and 

therefore made it possible for investors to participate in new and innovative ways. One form 

of financialization was securitization, or packaging of securities backed by mortgages2

—a 

process that allowed investors to invest in the U.S. housing market and that therefore 

linked individual homeowners to the global financial system of large banks, shadow 

banks (explained below in the section “Financial Market Disruptions”), and institutional 

investors. Participants in the securitization process had short-term incentives to profit 

without accounting for the risk; they largely passed the inherent risk of the underlying 

mortgage to the next participant in the securitization chain. While the securitization 

process had been around for decades before the housing boom, its scope expanded as new 

types of securities were generated. 

A number of the new types of securities were liquid and were assigned a high credit 

rating, despite being backed by pools of risky mortgages. As the housing boom progressed, 

the financial system continued creating various mortgage securities that were aimed at 

transforming the risk and meeting investor demand. For example, financial institutions 

transformed lower-rated tranches of mortgage-backed securities (explained below in 

the section “Mortgage Securitization”) into collateralized debt obligations that were 

1 Karl E. Case and Robert J. Shiller, “Is There a Bubble in the Housing Market?,” Brookings Papers on 

Economic Activity 2 (2003): 321, https://www.brookings.edu/wp-content/uploads/2003/06/2003b_bpea_ 

caseshiller.pdf. 

2 A detailed explanation of securitization is given in footnote 8. 
CHAPTER 1: Origins of the Crisis 5 

often AAA-rated. It was thought that by generating securities with different risk profiles, 

financial engineering of this kind could diversify and transform the risk associated with 

the underlying mortgages. Furthermore, derivatives that referenced these mortgage 

securities were created, spreading and amplifying the risk further into the system. These 

derivatives did not have cash flows based on actual mortgages but tracked the performance 

of mortgage securities, enabling investors to speculate on mortgage security performance. 

Financial institutions also began to issue credit default swaps to insure investors against 

losses on these securities. The risk of these securities, however, was not well understood. 

Nevertheless, the securities were held throughout the financial system, and because 

the financial system was highly interconnected, even institutions that were not directly 

involved with mortgage securitizations had some exposure to the mortgage market. As 

risk spread throughout the financial system, therefore, the entire system ultimately became 

exposed to the housing market. 

Another source of risk, besides exposure to risky mortgages, was high leverage. 

Financial institutions increased leverage by relying more on debt to finance their balance 

sheets. Although higher leverage enabled institutions to earn a higher return on equity, it 

also made them more vulnerable to greater losses if mortgage defaults should increase— 

as they ultimately did. 

Initial signs of the housing collapse to come emerged in 2006, as the housing market 

expansion slowed. In the middle of 2005, mortgage rates began to rise and, by the middle 

of 2006, had increased more than 100 basis points. Higher mortgage rates reduced housing 

market activity, causing home price growth to slow. After rising at double-digit annual 

rates for 27 consecutive months through early 2006, home prices peaked in mid-2006. The 

housing market slowdown eliminated the expectation of future investment gains and, 

along with it, the ability of borrowers to refinance (for without the expectation of rising 

prices, lenders would be unwilling to provide new funds); housing activity slowed even 

further. As interest rates rose and house prices began to fall, many homeowners became 

unable to meet mortgage payments on their existing loans or refinance into a new loan, 

and mortgage defaults rose rapidly. 

Yet, through the end of 2006, most macroeconomic indicators continued to suggest that 

the U.S. economy would proceed uninterrupted on its path of moderate growth. Indeed, 

aside from some concerns about an overheated housing market,3

 there was little in the 

way of financial data to suggest that the U.S. and global economies were on the verge of 

a financial system meltdown. In hindsight, however, we know that by the mid-2000s the 

United States was experiencing a housing price bubble of historic proportions and that 

already in 2006 the first signs of trouble were apparent. In 2007, when the bubble burst, the 

financial systems of the world’s most advanced economies were brought relatively quickly 

to the brink of collapse. 

Throughout 2006 and even into 2007, there was considerable and ongoing debate as to whether a housing 

price bubble actually existed. A consensus would not be reached until the collapse was well underway. 

3 
6 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

How did this happen? Ultimately, as house prices declined nationwide and 

mortgage defaults began rising, the value of all the mortgage-backed securities 

deteriorated. The rise in defaults, by undermining the value of trillions of dollars of 

mortgage-backed securities, severely disrupted the securitization funding mechanism 

itself. That mechanism—the securitization system that generated mortgage-backed 

securities (MBS) from mortgages—had become opaque and very complex, and the 

financial institutions involved were highly leveraged. The lack of transparency and the 

complexity of the securities masked the risk, and the high leverage left investors with 

little capital to cushion loss. Moreover, the financial institutions had underpriced risk, 

having been lulled into complacency by the prolonged period of economic stability that 

preceded the onset of problems. When mortgage defaults began to rise, the system’s 

interconnectedness, complexity, lack of transparency, and leverage exacerbated the 

effects of the crisis. Eventually, many of the largest financial institutions suffered 

catastrophic losses on their portfolios of mortgage-related assets, resulting in severe 

liquidity shortages. As noted above, even financial institutions without large MBS 

holdings were affected because they were deeply interconnected with the financial 

system in which MBS played so significant a role. 

Observing the devastating cascade of falling house prices, subprime mortgage 

defaults, bankruptcies, and write-downs (or reductions in the value of mortgage 

assets), investors and creditors lost confidence in the financial markets. The credit 

markets froze, and at the same time many overleveraged financial institutions were 

forced to sell assets at fire-sale prices, further reducing liquidity. Under mark-tomarket accounting rules,4

 these asset sales only precipitated further rounds of asset 

write-downs. The mounting losses strained financial institutions, causing many of 

them to fail. Eventually the situation became so dire that government interventions on 

an unprecedented scale were undertaken to break the downward spiral of defaults and 

to restore confidence in, and functionality to, the financial marketplace. 

As noted in Financial Crisis Inquiry Commission (FCIC), The Financial Crisis Inquiry Report: Final Report of 

the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011), 226– 

27, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf, mark-to-market is 

the process by which the reported value of an asset is adjusted to reflect the market value. The process had a 

detrimental effect during the crisis, as mark-to-market accounting rules required firms to write down their 

holdings to reflect the lower market prices. Firms claimed that the lower market prices did not reflect market 

values but, rather, reflected fire-sale prices driven by forced sales. 

4 
CHAPTER 1: Origins of the Crisis 7 

Housing Market Bubble and Mortgage Crisis (2006–2007) 

By the end of the 2000–2006 period, the rapid rise in U.S. house prices had transformed 

from a boom to a nationwide housing market bubble. Like all bubbles, this one could 

not be sustained forever, and the bursting of the bubble was devastating to many recent 

homebuyers, who (like many other people) had expected home prices to continue rising. 

In that expectation, many borrowers had taken out mortgages on which they were 

unable to continue making payments when the terms of their mortgages changed and 

housing prices fell (as noted above, falling prices meant lenders would not refinance). 

The bubble was fed not only by people taking out mortgages for homes, however. 

Also feeding the bubble was a system, created by financial institutions, that linked 

homebuyers’ demand for housing with investors’ demand for highly rated assets with 

high yields. Financial institutions purchased mortgages from mortgage originators, 

packaged the mortgages into securities, and sold the securities—whose credit quality, 

in retrospect, was inaccurately assessed by the rating agencies—to investors needing a 

safe place for their funds. These transactions, in turn, then provided the liquidity and 

short-term funding from the capital markets that mortgage lenders depended on to 

continue to originate loans. 

The chain linking homebuyers who were taking out mortgages with investors who 

were buying securities that were backed by pools of such mortgages was only as strong 

as its weakest link. When mortgage defaults rose, all the other links in the chain were 

irreparably weakened. 

The Rapid Rise in House Prices 

Coming out of the bank and thrift crisis of the late 1980s and early 1990s, the United 

States experienced an expansion of housing construction, a rise in home prices, and 

an increase in housing credit, all of which persisted through the 2001 recession and 

accelerated in the early 2000s. By the time national house prices peaked (in the middle 

of 2006), they had increased at double-digit annual rates for 27 consecutive months— 

from early 2004 through the first three months of 2006—culminating in a 14.2 percent 

annual gain in 2005 (see Figure 1.1). Reinhart and Rogoff observe that “between 1996 

and 2006, the cumulative real price increase was about 92 percent—more than three 

times the 27 percent cumulative increase from 1890 to 1996.”5

 Their research found no 

housing price boom during that 106-year period comparable in sheer magnitude and 

duration to the one that ended in the subprime mortgage crash that began in 2007. 

Indeed, the extremes of housing value during the housing boom and bust of the mid2000s stand out starkly, as Figure 1.2 illustrates. 

Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly (2009), 207. 5 
 

8 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Figure 1.1. S&P/Case-Shiller Home Price Index, 1987–2013 

Year-Over-Year Percent Change National Index Value 2000 = 100, NSA 

20
 

15
 

10
 

5
 

0 

-5 

-10 

-15 

Change in Home Price, Year-Over-Year (L) 

Home Price Index (R) 

Peak: July 2006 200
 

175
 

150
 

125
 

100
 

75
 

50
 

25
 

0
 

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
 

Source: S&P/Case-Shiller (Haver Analytics). 

Figure 1.2. Real Home Price Index, 1890–2013 

Index (1890 = 100) 

200
 

180
 

160
 

140
 

120
 

100
 

80
 

60
 

Great Depression 2000s 

and World War II Boom 

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
 

Source: Robert J. Shiller, http://robertshiller.com.
 

Note: Index is based on inflation-adjusted sale prices of standard existing homes, not new construction, to track the 


value of housing as an investment over time. 

 

CHAPTER 1: Origins of the Crisis 9 

Several factors contributed to the run-up in housing prices. One was low interest rates: in 

July 2003, the federal funds rate declined to 1.01 percent, its lowest level in 45 years, while 

in June 2003, the Freddie Mac 30-year conventional mortgage rate fell to 5.21 percent, the 

lowest level in the 32-year history of the Primary Mortgage Market Survey. This prolonged 

period of low rates after the 1991–1992 recession made mortgages less expensive, thus 

increasing demand, and, with increased demand, house prices began rising. Another factor 

in the price run-up was the origination of mortgage products that increased demand by 

enabling less-creditworthy borrowers to qualify for mortgages (see the box titled “Types of 

Mortgage Products”). Financial institutions, including a number of large thrifts, investment 

banks, and commercial banking organizations, acted as originators of subprime and Alt-A 

mortgages and also as underwriters and issuers of securitizations backed by these loans.6 

A third factor in driving up prices was the influx of investors into the housing market: 

drawn by the expectation of future house price appreciation, investors bought homes for 

investment gain, not residence. All of this was consistent with Case and Shiller’s description 

of a housing bubble. “The notion of a bubble,” they write, “is really defined in terms of 

people’s thinking: their expectations about future price increases, their theories about the 

risk of falling prices, and their worries about being priced out of the housing market in the 

future if they do not buy.”7 

As interest costs fell and, in response, the demand for mortgages increased, the funding 

for mortgages increased significantly, allowing lenders to offer credit to more borrowers. 

Behind this increase in funding were (1) a heavy demand of investors worldwide for highly 

rated assets with high yields, and (2) the satisfaction of that demand through the mortgage 

securitization process, which allowed the financialization of mortgage assets.8 

The heavy worldwide demand for safe assets was brought about by an increase in global 

savings. This glut of global savings reflected many factors, including the buildup of foreign 

exchange reserves in emerging market economies and the aging populations in industrial 

economies (retirees have higher savings).9

 The securitization process that served to satisfy 

the worldwide demand involved the packaging of pools of mortgages into securities that 

6 Inside Mortgage Finance Publications, The 2010 Mortgage Market Statistical Annual, vol. 2, 2010. 

7 Case and Shiller, “Bubble in the Housing Market?,” 301. 

8 As explained in the overview section, financialization of housing assets means that “illiquid real estate was 

turned into a financial asset that could be traded more easily and therefore made it possible for investors 

to participate in new and innovative ways.” Securitization is the process by which assets with generally 

predictable cash flows and similar features are packaged into interest-bearing securities with marketable 

investment characteristics. Investors buy the right to future cash flow, thus providing increased liquidity back 

to the seller, who then has additional monies to lend. Over time, securitized assets have been created using 

diverse types of collateral, including home mortgages, commercial mortgages, mobile home loans, leases, 

and installment contracts on personal property. The most common securitized product is the mortgagebacked security (MBS). 

9 Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” remarks at the Sandridge 

Lecture, Virginia Association of Economists, Richmond, VA, March 10, 2005, https://www.federalreserve. 

gov/boarddocs/speeches/2005/200503102/. 
10 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

could be sold to institutional and individual investors as a way to transfer risk among 

investors; the investors received rights to cash flows of the underlying mortgage pools. 

The relatively illiquid mortgage asset could be quickly bought or sold in the market 

without the asset’s price being affected, and innovations in finance supplied different types 

of assets with different risk profiles to suit different investor requirements, not only the 

need for safety. Securitization, which came to dominate mortgage funding, was the vehicle 

by which global savings contributed to the decline in longer-term interest rates and, in 

addition, helped finance the U.S. residential market (investment in MBS increased the 

liquidity available for financing additional mortgages, as explained in the next section). 

The Foundations of the Mortgage Crisis 

Just when the increased liquidity provided by securitization allowed lenders to offer credit 

to more borrowers, the rapid increase in home prices reduced affordability—but also 

fed buyer interest in purchasing a home (either to own or to turn a profit) before prices 

rose further. Lenders, competing to attract customers and to meet the financing needs of 

prospective homebuyers, diversified their mortgage offerings and eased lending standards. 

Both of these practices—offering nontraditional mortgages and the relaxation of lending 

standards (see the box titled “Types of Mortgage Products”)—helped homebuyers bridge 

the affordability gap and facilitated lending to less-creditworthy borrowers. 

Accommodating borrowers was made easier by the mortgage securitization system. 

Banks and other mortgage originators originated loans, then distributed them by 

selling them in the secondary loan market; the purchasers of the loans were mortgage 

securitizers, who paid the originators, or lenders, high fees for mortgages; and the high 

fees created incentives for lenders to fill the securitization pipeline by relaxing lending 

standards and in some cases by aggressively marketing mortgages. The securitization 

process is described in more detail below, in the section “Mortgage Securitization.” This 

“originate to distribute” model led to a rise in predatory lending that targeted a wide 

spectrum of consumers who might not have understood the embedded risks but used 

the loans to close the affordability gap. In the end (see the next section, “The Housing 

Market Collapse”), the originate-to-distribute model, with the misaligned interests of 

all parties, undermined responsibility and accountability for the long-term viability 

of mortgages and mortgage-related securities and contributed to the poor quality of 

mortgage loans and, ultimately, to the riskiness of the securities backed by the loans. 
CHAPTER 1: Origins of the Crisis 11 

Types of Mortgage Products 

Mortgages fall into two broad categories: prime and nonprime. Prime loans are 

issued to borrowers whose more pristine credit is considered most creditworthy. 

Such borrowers receive the best rate. Nonprime is the generic term for loans whose 

mortgage interest rates are substantially higher than the prevailing prime rate. The 

two types of nonprime loans are subprime and Alternative-A, or Alt-A. 

Subprime loans are higher-interest loans that involve elevated credit risk and 

are generally viewed as higher risk. Alt-A mortgages are made to borrowers with 

credit ranging from very good to marginal, but they are made under expanded 

underwriting guidelines that make these loans higher risk and also higher interest. 

When strong home price appreciation and declining affordability helped drive up 

the demand of borrowers for mortgage products that would allow them to stretch 

their home-buying dollars, lenders—flush with mortgage credit—accommodated 

by offering nontraditional (alternative) mortgage products. Nontraditional 

mortgage loans have some features that differ from a plain-vanilla prime loan. 

Among the nontraditional mortgages originated during the boom were interestonly mortgages (IOs), adjustable rate mortgages (ARMs) with flexible payment 

options (option ARMs, or payment-option mortgages), simultaneous secondlien or piggyback mortgages, and no-documentation or low-documentation 

loans. IO and payment-option loans were specifically designed to minimize 

initial mortgage payments by eliminating or relaxing the requirement to repay 

principal during the early years of the loan. Piggyback mortgages were a lending 

arrangement in which either a closed-end second lien or a home equity line of 

credit was originated at the same time as the first-lien mortgage loan to take the 

place of a larger down payment. In no-documentation or low-documentation 

loans, the documentation standards for verifying a borrower’s income sources or 

financial assets were reduced or minimal. 

Any of these loans—prime, subprime, nontraditional—could be structured as 

an adjustable rate mortgage. ARMs have an interest rate and payment that change 

periodically over the life of the loan, the changes being based on changes in a specific 

index. In addition, there are hybrid ARMs and option ARMs. The former, also 

known as short-term hybrids, have an initial fixed rate for two or three years and 

then turn into an adjustable rate loan with an annual adjustment in rate or payment 

or both. The option ARMs allow borrowers to set their own payment terms on a 

monthly basis. The borrower could, for example, make a minimum payment lower 

than the amount needed to cover interest; or pay only interest, deferring payment 

of principal; or make payments calculated to have the loan amortize in 15 or 30 

years. Interest typically was reset every month, and interest payments that were 

deferred were added to principal through negative amortization. continued 
12 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Problems escalated when risk layering occurred—that is, when a loan combined 

several risky features. An example of such a loan was a subprime hybrid ARM: 

a variable-rate loan offered to a subprime borrower, with an initial rate that was 

probably quite low (to tease the borrower in) but that after a short period increased 

to monthly payments that were often unaffordable. Another example was a nonamortizing interest-only mortgage made to a borrower on the basis of little or no 

documentation to validate the borrower’s income or assets. When risk layering 

occurred, products grew in complexity, and the total risk was heightened. 

Among the new, nontraditional mortgage offerings, many were structured as 

adjustable rate loans, not fixed rate. More than three-fourths of the subprime mortgages 

that were originated during the period 2003 through 2007 were short-term hybrids 

(the interest rate is fixed for the first couple of years and then becomes adjustable and 

benchmarked to short-term rates).10 Most Alt-A loans were also adjustable rate loans, as 

were most option adjustable rate mortgages. Option ARMs, as noted, offered borrowers 

the choice of making full payments, interest-only payments, or minimum payments that 

were less than the interest due. About 94 percent of option ARM borrowers made only 

the minimum monthly payment, creating negative amortization.11 Like the subprime 

short-term hybrid mortgages, ARM loans had interest rates that were fixed for the 

first couple of years but then were benchmarked to the LIBOR rate.12 Under the more 

relaxed underwriting standards at the time, many borrowers qualified for adjustable 

rate mortgages based only on their ability to pay the low initial monthly payments as 

determined under the introductory teaser rate. Hence, their ability to afford the mortgage 

after the teaser rate expired was predicated on their ability to refinance the mortgage 

before the higher payments became effective. 

The ability to refinance—counted on by many investors, homebuyers, and originators— 

depended critically on house prices. As long as house prices were rising, lenders were 

generally willing to supply new funds with new terms. And even after house prices at the 

national level peaked, in mid-2006, housing market participants generally did not expect 

house prices to crash. After all, the United States had not experienced large nationwide 

declines in house prices since the Great Depression. In mid-2006, some observers saw the 

10 Christopher J. Mayer, Karen M. Pence, and Shane M. Sherlund, “The Rise in Mortgage Defaults,” Federal 

Reserve Board Finance and Economics Discussion Series 59 (2008): 5, https://www.federalreserve.gov/pubs/ 

feds/2008/200859/200859pap.pdf. 

11 Austin Kilgore, “Subprime Problems Persist, as Alt-A, Option ARM Crisis Brews,” HousingWire, January 11, 

2010, https://www.housingwire.com/articles/6208-subprime-problems-persist-alt-option-arm-crisis-brews. 

12 LIBOR stands for the London interbank offered rate; this rate is set daily and is the interest rate at which 

banks offer to lend funds to one another in the international interbank market. 
CHAPTER 1: Origins of the Crisis 13 

turning point (identified as such only in retrospect) as nothing more than a correction, 

not the presage of a precipitous decline: 

With interest rates rising and speculative demand cooling, 

the housing boom is coming under pressure ... As long as the 

economy continues to create jobs and builders trim production 

to match slowing demand, house prices will keep climbing and 

the housing sector will likely achieve a soft landing. Although 

house price growth will likely moderate in many areas, sharp 

drops in house prices are unlikely anytime soon. Major house 

price declines seldom occur in the absence of severe overbuilding, 

major job loss, or a combination of heavy overbuilding and 

modest job loss. Fortunately, these preconditions are nowhere in 

evidence across the nation’s metropolitan areas.13 

In hindsight, optimism in the housing market outlook in mid-2006 was based on a 

major misreading of the market. Pressures had already been building against further 

house price appreciation. In 2004, the Federal Reserve had started to tighten monetary 

policy by raising the target federal funds rate in response to the increasing pace of 

economic activity. Nevertheless, through 2005 and into 2006, despite the rise in interest 

rates, a continuing flow of funds into the mortgage market maintained the easy credit 

conditions and, even as the housing market expansion began to slow, homeowners 

remained able to refinance. However, in 2006, with interest rates rising and (as shown in 

Figure 1.3) house prices beginning to decline, homeowners whose mortgage payments 

were indexed to interest rates were unable to refinance. Many homeowners and housing 

investors were stuck with homes they could neither afford nor sell. Thus, the stage was 

set for increasing numbers of delinquencies, defaults, and foreclosures. 

The Housing Market Collapse 

According to the Financial Crisis Inquiry Commission (FCIC), one of the first signs of the 

impending collapse was an increase in the number of early payment defaults—defined as 

occurring when a borrower becomes more than 60 days delinquent within the first year 

of a mortgage. Defaults on subprime and Alt-A mortgages began to rise in late 2005. As 

house prices declined further, default rates on higher-quality mortgages also rose, as shown 

in Figure 1.4. By mid-2010, almost one out of every ten mortgage loans was past due, with 

almost 30 percent of subprime ARM borrowers and almost 14 percent of prime ARM 

borrowers in delinquency.14 In addition, the decline in house prices resulted in negative 

13 Joint Center for Housing Studies, “Affordability Problems Escalating Even as Housing Market Cools. 2006 

State of the Nation’s Housing Report Is Released,” Press Release, Harvard University, John F. Kennedy School 

of Government, June 13, 2006. 

14 Mortgage Bankers Association, “Delinquencies and Foreclosure Starts Decrease in Latest MBA National 
14 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

equity for many homeowners who had bought homes with little or no down payment. 

These homeowners were underwater on their mortgages (i.e., the value of the outstanding 

mortgage exceeded the value of the home). The share of underwater homeowners out of 

all homeowners with a mortgage rose drastically as, eventually, house prices at the national 

level declined more than 30 percent from their peak—and in some areas of the country, 

they fell more than 50 percent. By 2010, more than 12 million homeowners—about 1 in 4 

with a mortgage—owed more than their homes were worth.15 

Figure 1.3. Home Sales and Home Price Index, 2000–2013 

Existing Home Sales S&P/Case-Shiller Home Price Index
 

Thousands of units National Index Value 2000 = 100, NSA
 

50 

75 

100 

125 

150 

175 

200 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

8,000 

Existing Home Sales (L) 

Home Price Index (R) 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Sources: S&P/Case-Shiller and National Association of Realtors (Haver Analytics). 

Of the players linked in the securitization chain, one of the earliest to feel the effects 

of the downturn in housing prices was mortgage originators, for which subprime loans 

represented a significant portion of revenue and assets. As subprime loan originations 

plummeted from 20 percent of total mortgage production in 2006 to 8 percent in 2007,16 

subprime originators faltered. By the spring of 2008, with the failure of many subprime 

originators (including top lenders Countrywide Financial Corporation and Ameriquest 

Mortgage Company), the U.S. subprime mortgage industry had essentially collapsed. 

Delinquency Survey,” August 26, 2010, https://www.mba.org/x73818. 

15 CoreLogic, CoreLogic® Equity Report, 4Q 2013 (2014), 8. 

16 Inside Mortgage Finance Publications, The 2010 Mortgage Market Statistical Annual (2010), vol. 1, 2010. 
15 

35 

CHAPTER 1: Origins of the Crisis 

Figure 1.4. Mortgage Loans Past Due, by Type of Loan, 2000–2013 

Percent 

5 

10 

15 

20 

25 

30 All Loans 

Conventional Prime ARM 

Conventional Subprime 

Conventional Subprime ARM 

0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Source: Mortgage Bankers Association (Haver Analytics). 

From the Mortgage Crisis to a Financial Crisis (2008) 

The ramifications of the mortgage crisis went far beyond mortgage originators, as the 

securitization chain also involved (among others) mortgage servicers, underwriters, 

guarantors, and securitizers. The chain stretched across many players from depository 

institutions to investment firms, with interconnections that were extensive and opaque, 

and risks that were magnified by the increased use of financial leverage in a generally 

deregulatory climate. Because of the high interconnectedness within the financial 

system, the collapse of the subprime mortgage industry undermined the securitization 

system itself and the financial markets. 

The central element of the securitization chain, as has been noted, was pools of 

mortgage-backed securities. But the pivotal role played by these securities depended on 

the assurance investors received from rating agencies that these securities were priced 

appropriately for the risk they contained—and as mortgages defaulted, the MBS and 

securities derived from them had to be downgraded. Firms that were heavily invested in 

such securities and at the same time highly leveraged were caught in a vise, and even the 

reputations of the rating agencies themselves were tarnished. 
16 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Mortgage Securitization 

The securitization process was a way to pool individual mortgages into a bond, that 

is, a security, to be sold to investors. The resulting mortgage-backed security was often 

carved into different pieces, or tranches, with a range of risk and return to appeal to 

investors’ differing appetites. Investors bought the tranche(s) that served their needs. 

The senior tranches were the highest rated and were considered to have the lowest risk 

and the highest priority for payment. The equity tranches were the lowest tranches; they 

had the highest return but also the highest risk because they would be the first to lose 

money if mortgage loan borrowers defaulted. 

Historically, securitization for the mortgage market was provided primarily by Fannie 

Mae and Freddie Mac, which are Government-Sponsored Enterprises (GSEs) created by 

Congress to provide the U.S. housing market with liquidity, stability, and affordability.17 

Fannie and Freddie, private companies at the time of the boom,18 purchase and securitize 

mortgages, selling the securitized mortgages to outside investors and holding some 

mortgages and MBS as investments. With the housing market heating up, however, nonagency (or private label) securitization activity—until then a relatively small share of 

the market—ramped up to exceed the securitization activity of the GSEs. Figure 1.5, 

showing MBS issuance from 1990 to 2013, displays the striking rise in the volume of 

private label MBS issued beginning in 2002. Private label MBS doubled in dollar volume 

from 2003 to 2005, increasing to over half of total MBS issuance in 2005 and 2006. 

The increase in private label securitization activity, which involved many different types 

of firms within the financial system, created tremendous capacity for new mortgages. To 

fill the pipeline, as noted above, mortgage originators began to lower credit standards or 

ease documentation requirements or both. One result was that mortgage pools became 

more risky. In an attempt to generate securities that were low risk, financial institutions 

turned to creative re-securitizations by securitizing the tranches of risky mortgage 

securities into higher-rated securities. (The fundamental assumption was that although 

all the tranches were backed by risky mortgages, some of the mortgages would pay out, 

and as long as they did, they would satisfy the payments needed to pass through to the 

newly securitized higher-rated security.) Ultimately, however, despite the higher ratings, 

the securities proved very risky—and at the end, defaults were so large and so numerous 

that the payment stream to these securities dried up. 

The basic security—the mortgage-backed security—became the building block of 

more-complex products, as MBS themselves were re-securitized into securities and sold 

to investors as well as traded among the financial institutions that created them.19 For 

17 Fannie’s formal name is Federal National Mortgage Association (FNMA). Freddie’s is Federal Home Loan 

Mortgage Corporation (FHLMC). 

18 Fannie Mae and Freddie Mac were put into government conservatorship in September 2008. This is covered 

in more detail below, in the section “Institutions in Crisis in 2008.” 

19 A financial “product” is an instrument that involves moving money from one party to another. Thus, the 
CHAPTER 1: Origins of the Crisis 17 

example, lower-rated MBS were repackaged into collateralized debt obligations (CDOs). 

Like MBS, CDOs were issued in tranches that varied in risk and had ratings that ranged 

from high to low,20 with investors in the lowest rated of these securities being exposed to 

the highest risk. In this manner, mortgage risk appeared to be further diversified. Adding 

to the perceived reduction of risk were credit default swaps (CDS), which provided 

investors with insurance against losses on MBS, as explained in the next section. 

Figure 1.5. Issuance of Mortgage-Backed Securities, 1990–2013 

Billions of Dollars 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

0 

Source: Inside MBS & ABS, Inside Mortgage Finance. 


Reprinted with permission. Inside Mortgage Finance Publications, Inc. www.insidemortgagefinance.com.
 

Private-Label 

Fannie Mae 

Freddie Mac 

Ginnie Mae 

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 

Another source of risk was a technique, also involving MBS, that banking companies 

often used to increase their leverage without running afoul of regulatory requirements. 

They would retain MBS in structured investment vehicles (SIVs), which were highly 

leveraged entities held by banking companies but which, as separate legal entities, 

were off the banks’ balance sheets and were therefore not subject to regulatory capital 

requirements, even if a SIV’s parent holding company was under federal supervision. 

SIVs were designed to generate cash flows by issuing short- to medium-term debt— 

including asset-backed commercial paper21—at a low interest rate to raise funds that the 

term can refer equally to a simple loan or a complex security. A home equity line of credit is a financial 

product, and so are collateralized debt obligations, which are securities made up of repackaged MBS. 

20 FCIC, Final Report, 127–29, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full. 

pdf. 

21 Asset-backed commercial paper is a short-term promissory note whose repayment is backed by cash flows 
18 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

institution could invest in longer-term assets, such as MBS. SIVs were first established in 

1988 and remained relatively unscathed during pre-2007 periods of financial distress. By 

2007, there were 36 SIVs and, between 2004 and 2007, the total assets held in SIVs had 

tripled to $400 billion,22 meaning that SIVs had come to have substantial exposure to the 

mortgage market. The exposure would lead to their demise. 

In sum, by generating a variety of complex financial products based on pools of 

mortgages, private label securitizers created within the financial system an additional 

level of complexity, opacity, and interconnectedness. Investment entities and financial 

institutions were heavily involved in securitizing and underwriting MBS, investing in 

derivatives, and generally creating and investing in new financial products.23 But the 

opacity of these instruments and activities masked the underlying systemic risk, which 

derived both from the riskiness of the mortgages backing the securities and from the 

highly leveraged nature of many of the institutions involved. Investment banks (part of the 

shadow banking system) were not subject to the types of restrictions on the use of financial 

leverage that banks were subject to, and were therefore able to expand their balance sheets 

by increasing leverage to a greater extent than federally supervised banks were allowed 

to.24 Finally, although the deep interconnectedness among investment entities and financial 

institutions spread risks across the securitization chain, it also created conflicts of interest 

within the chain: originators and underwriters (at the front of the chain) were not acting in 

the best interest of the investors and bondholders (at the end of the chain).25 

The Role of Rating Agencies and the Devastating Effect of Downgrades 

During the years when subprime losses were materializing, one group critical to the entire 

mortgage-based investment process was credit rating agencies. Credit rating agencies 

assign credit ratings to a variety of financial institutions and financial assets, and during 

the period in question, the agencies were rating MBS. The reason these ratings were critical 

is that both investors and insurers of investment contracts relied on them. Investors relied 

(and still rely) on credit ratings—particularly on those issued by one of the Nationally 

from specific pools of assets such as trade receivables or mortgages. This commercial paper plays a prominent 

role in the section below titled “Financial Market Disruptions.” 

22 FCIC, Final Report, 252. 

23 According to the FCIC, derivatives are financial contracts whose prices are derived from the performance 

of an underlying asset, rate, index, or event. The use of derivatives grew significantly during the 2000s as a 

way to ensure payment (losses due to price movement could be recouped through gains on the derivatives 

contract). The resulting growth in leverage made financial institutions “vulnerable to financial distress or 

ruin if the value of their investments declined even modestly” (ibid., xix, 45–51). 

24 For a more detailed discussion of the shadow banking system and financial interconnections, see Zoltan 

Pozsar et al., “Shadow Banking,” Federal Reserve Bank of New York Staff Report 458 (2010), https://www. 

newyorkfed.org/medialibrary/media/research/staff_reports/sr458.pdf. 

25 International Monetary Fund, “Navigating the Financial Challenges Ahead,” Global Financial Stability 

Report (2009), 77–115. 
CHAPTER 1: Origins of the Crisis 19 

Recognized Statistical Rating Organizations (NRSROs)26—to assess the credit quality of 

their investments. Many investors (for example, pension funds) are required to adhere 

to mandates on the quality distribution of assets they hold, and the quality distribution 

is typically determined by the credit ratings from an NRSRO. In addition, credit rating 

agency ratings are often used in investment contracts to protect investors against a 

possible credit downgrade. For example, if investors bought AAA-rated securities (such 

as mortgage derivatives) because they believed—on the basis of the rating—that the 

securities were risk free, but the securities were subsequently downgraded, the contract 

might have entitled the creditor to demand collateral from the debtor. Insurers, too, 

relied on credit ratings when they started guaranteeing the AAA ratings of MBS, putting 

their own reputation and financial strength on the line because of confidence in the 

credit ratings issued by the agencies. 

In 2007, subprime defaults were increasing, and the performance of MBS and other 

structured financial products started deteriorating. According to Benmelech and 

Dlugosz, deterioration in the credit ratings of such products began likewise in 2007. In 

that year, there were more than 8,000 downgrades, eight times the number in 2006.27 

In the first three quarters of 2008, there were almost 40,000 downgrades, far exceeding 

the cumulative number of downgrades for the period 2000 through 2007. Moreover, 

the magnitude of the downgrades—the number of levels, or “notches,” by which 

each rating was lowered—became much more severe in 2007. In 2005 and 2006, the 

average downgrade each year was 2.5 notches, but in 2007 the average downgrade was 

4.7 notches, and in 2008 it was 5.6 notches.28 The sharp increase in the number and 

severity of downgrades was devastating for the holders of the securities affected, for the 

reputation of the rating agencies themselves, and for insurers. 

The holders of the securities found that their previously AAA-rated investments—the 

highest rated, considered the safest of investments—had become unmarketable.29 Under 

mark-to-market accounting rules, institutions that held these now-unmarketable mortgagebacked bonds had to write them down.30 Investor demand plummeted and securitization 

activity dropped precipitously. Private label securitization—which, as noted, had provided 

much of the funding for new mortgages—continued dropping until, in 2008, it virtually 

disappeared. As a result, many underwriters were stuck holding large portfolios of mortgages 

and MBS that could not be sold and were quickly losing value. This downturn would have 

significant implications for the financial markets, as discussed in the next two sections. 

26 NRSROs are credit rating agencies registered as such with the Securities and Exchange Commission. 

27 Efraim Benmelech and Jennifer Dlugosz, “The Credit Rating Crisis,” NBER Macroeconomics Annual 2009 24 

(2010): 172. 

28 Ibid., 170. 

29 Carl Levin, Hearing of the U.S. Senate Permanent Subcommittee on Investigations, “Wall Street and the 

Financial Crisis: The Role of Credit Rating Agencies,” Opening Statement, April 23, 2010, 4. 

30 FCIC, Final Report, 227–30. 
20 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Among the many reasons mentioned above for the puncturing of the housing 

bubble was new pricing information that contributed to the decline in MBS values. 

Gorton makes an important point about the role that information about the MBS 

market played in puncturing the housing and mortgage-backed securities bubble. He 

observes that information about the pricing of residential mortgage-backed securities 

was not commonly available in real time until the ABX index was introduced, at the 

start of 2006.31 The ABX index measures the value of subprime mortgages. He states, 

“The introduction of these indices is important for two reasons. First, they provided 

a transparent price of subprime risk, albeit with liquidity problems. Second, [the 

transparent price of subprime risk] allowed for [the efficient] shorting of the subprime 

market,”32 enabling investors to hedge their positions.As seen in Figure 1.6, new vintages 

in 2007 declined sharply upon issuance. Gorton states that “it is not clear whether the 

housing price bubble was burst by the ability to short the subprime housing market or 

whether house prices were going down and the implications of this were aggregated 

and revealed by the ABX indices.”33 Regardless, he makes a compelling case that the 

ABX index provided transparency for the pricing information on subprime MBS, 

revealing deterioration and playing an important role in the decline of house prices, as 

investors pulled out of the housing market. 

As financial stress continued and investors increasingly questioned the credibility of 

the credit ratings, the reputation of rating agencies declined. As they kept downgrading 

MBS and CDOs, it became apparent that the high ratings previously assigned to these 

securities had been overstated and were overly optimistic. Part of the problem was that 

the models used by credit rating agencies were based on more traditional mortgage 

products than the ones in the market at the time and on historic data that did not cover 

an episode of a nationwide downturn. The data covered the recent period characterized 

by low delinquency and default rates, and housing downturns that were concentrated 

in just some states. The models did not account for the risk scenario of a massive, 

nationwide decline in home prices.34 Another part of the problem was that financial 

institutions that issue securities paid rating agencies to rate their products, and the 

institutions typically shopped around for favorable ratings. Many observers have noted 

that the desire to retain business encouraged credit rating agencies to provide securities 

ratings that were agreeable to the issuing institutions.35 

31 The ABX index is a financial benchmark that references 20 equally weighted residential mortgage-backed 

security tranches. There are also sub-indexes for bonds based on their rating level: AAA, AA, A, BBB, and 

BBB–. The “vintage” of an ABX index refers to the date it was introduced. 

32 Gary Gorton, “The Subprime Panic,” European Financial Management 15, no. 1 (January 2009): 32. 

33 Ibid., 34. 

34 Markus K. Brunnermeier, “Deciphering the Liquidity and Credit Crunch 2007–2008,” Journal of Economic 

Perspectives 23, no. 1 (Winter 2009): 81, http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.77. 

35 See, for example, Simon Johnson and James Kwak, Thirteen Bankers (2010), 139. 
CHAPTER 1: Origins of the Crisis 21 

The rating downgrades also affected monoline insurers, companies whose single line 

of business was to guarantee financial products and whose role in the mortgage market 

had increased during the years leading up to the financial crisis. Monoline insurers 

traditionally insured municipal bonds against default, but during the years preceding 

the financial crisis, they started to insure mortgage securities, issuing CDS that insured 

against declines in the price of CDOs and MBS. As noted above, this insurance 

guaranteed the AAA ratings on these securities. The value of the guarantee was based 

on the AAA status of the insurer. 

Figure 1.6. Mortgage Credit Default Swap ABX Indexes 

ABX Index 7-1 Series Price 

100 

80 

60 

40 

20 

0 

1/19/2007 5/19/2007 9/19/2007 1/19/2008 5/19/2008 9/19/2008 

AAA 

AA 

A 

BBB 

BBBSource: Bloomberg.
 

Note: The 7-1 series started January 1, 2007. 


As mortgage CDO and CDS issuances grew, investment banks created synthetic 

CDOs. These synthetic CDOs referenced mortgage securities but were not actually 

backed by them or by mortgage assets. Instead, they were backed by credit default swaps. 

In essence they reflected bets on the mortgage market—bets that increased leverage in 

the system without actually financing mortgages (see the box titled “CDOs and CDS”). 

Weakness in the mortgage markets challenged the profitability of monoline insurers, 

and the challenge to the insurers’ profitability worried holders of CDS guarantees. 

Because many insurers did not expect to incur losses, they were thinly capitalized. In 

late 2007, one of the smaller insurers, ACA, reported a net loss of $1.7 billion due to 
22 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

losses on CDS contracts.36 In January 2008, Fitch Ratings downgraded monoline insurer 

Ambac, and rating agencies then began downgrading other monoline insurers; the 

downgrades continued through the end of the summer. In June of that year, Standard 

and Poor’s downgraded monoline bond insurer MBIA, which at that time was liable for 

$2.9 billion to satisfy potential termination payments and for approximately $4.5 billion 

in underlying collateral.37 Markets reacted by selling MBS, CDOs, and related securities, 

and the stock prices of monoline insurers (as well as of other financial institutions that 

were exposed to mortgage securities) continued to decline. 

CDOs and CDS 

Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDS) played 

integral roles in spreading and amplifying the risk of the mortgage market 

throughout the financial system. 

CDOs were a type of mortgage asset structured from lower-rated tranches of 

MBS tranches that were individually difficult to sell to investors, who demanded 

highly rated securities. CDOs were structured to further diversify the risk of a given 

pool of lower-rated tranches of MBS, on the assumption that payments would flow 

from some of the MBS tranches, even if other tranches were to bear losses. CDOs 

were structured like MBS, with a waterfall of payments going first to the AAArated tranche. About 80 percent of the tranches of these CDOs were highly rated, 

despite the fact that their value was based on lower-rated tranches of MBS. Lowerrated tranches of CDOs were further bundled and packaged into new CDOs, called 

CDO squared. The CDO process exposed risk not only to CDO investors but to the 

securities firms that issued CDOs, as they held the lower-rated MBS tranches until 

the CDO was issued. The risk was further spread throughout the financial system 

as these securities were used as collateral in short-term funding markets. 

In addition, key financial institutions issued CDS to insure against losses on 

MBS, CDOs, and other mortgage securities. CDS were a type of financial contract 

in which the issuer retained the risk of default and paid the CDS purchaser in the 

event of default. The CDS served as insurance to the purchaser, who did not need 

to own the security. CDS issuance ramped up along with the rise of CDOs and 

other mortgage securities. CDS issuance was profitable as long as the mortgage 

market remained strong and the insured mortgage securities were considered low 

risk. By providing insurance against losses on mortgage securities, CDS furthered 

continued 

36 FCIC, Final Report, 276. 

37 FCIC, “Credit Ratings and the Financial Crisis,” Preliminary Staff Report, (2010) 8, http://fcic-static.law. 

stanford.edu/cdn_media/fcic-reports/2010-0602-Credit-Ratings.pdf. 
CHAPTER 1: Origins of the Crisis 23 

the perception of the safety of the system and perpetuated investor demand for 

what were, in fact, precarious mortgage securities. 

Synthetic CDOs consisted of CDS that referenced MBS and CDOs without 

containing cash flows from these mortgage securities. Since they only referenced 

mortgage securities, synthetic CDOs did not directly finance mortgage issuance, 

but enabled investors to speculate on the mortgage market. For example, "short" 

synthetic CDO investors who bought a CDS agreement on a referenced CDO paid 

premiums to the CDO and received payment from the CDO if the referenced 

CDO did not perform. "Unfunded long" synthetic CDO investors who bought a 

CDS agreement on a referenced CDO received premiums if the referenced CDO 

performed, but had to pay out if it did not perform. 

The financial system aimed to diversify mortgage risk by creating new highly 

rated mortgage securities to meet investor demand. The demand for highly 

rated mortgage securities further supported mortgage issuance. Ultimately, the 

performance of the different tranches of the MBS securities upon which CDOs and 

CDS were based, were highly correlated. When MBS losses mounted, the losses 

were amplified throughout the financial system. 

Source: FCIC, Final Report, Chapter 8. 

Financial Market Disruptions: Illiquidity and Fire Sales 

As financial distress spread across the securitization chain, the ripple effects from the 

troubles in the housing market began to reach deeper into the financial system. Uncertainty 

over collateral value, asset quality and asset liquidity, and counterparty creditworthiness 

caused a rapid withdrawal of short-term liquidity, especially in the shadow banking 

system (see second paragraph below). Illiquidity, on top of high leverage, forced firms to 

engage in asset fire sales, which depressed asset prices even further. 38 

With so much of short-term lending based on collateral composed of now-discredited 

structured products, the market completely shut down. Some nonbank entities were able 

to obtain liquidity support for their mortgage-related assets from their banking affiliates, 

which had access to Federal Reserve liquidity facilities.39 For financial institutions with 

38 Brunnermeier, “Deciphering Liquidity,” 77–100. 

39 When market liquidity dried up during the crisis, concerns about financial stability prompted the Federal 

Reserve to grant exemptions to Sections 23A and 23B of the Federal Reserve Act, which limit transactions 

between banks and their nonbank affiliates such as broker-dealers and insurance companies. The 23A 

and 23B restrictions are intended to limit the exposure of a bank to its nonbank affiliates (a bank is 

regulated, protected by FDIC deposit insurance, and allowed access to Federal Reserve liquidity facilities; 

a nonbank affiliate is not). The exemptions allowed bank holding companies to obtain liquidity for their 

nonbank subsidiaries from bank subsidiaries that could access the Federal Reserve’s liquidity facilities. See 
24 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

limited access to funding markets, the only way to raise collateral was by selling assets 

at steep discounts, but these fire-sale prices were then used to mark-to-market similar 

assets, beginning another round of fire sales. These market disruptions caused distress in 

the financial system, particularly in the shadow banking system. 

The shadow banking system consists of broker-dealers, money market mutual funds 

(MMFs), hedge funds, insurance companies, and other nondepository financial institutions 

(including investment banks) that match short-term investor cash with longer-term assets. 

The complex web of financial linkages among these entities was an important channel 

for propagating the mortgage crisis. These entities, as well as banks, relied heavily on 

short-term funding, which they accessed through a variety of instruments that were based 

in some way on MBS or the underlying mortgages.40 Two examples of such short-term 

funding vehicles are repurchase agreements (repos) and commercial paper. 

Repos are contracts under which the repo holder (a hedge fund, for example) sells 

securities to another financial firm (an MMF, for example) with the agreement to buy 

back the securities at a later date (usually overnight), typically at a higher price. In effect, 

repos are short-term, collateralized loans. Commercial paper is a short-term, unsecured 

promissory note. Asset-backed commercial paper (ABCP) is a short-term promissory 

note for which payment is based on cash flows from securitizations or the underlying 

assets. Institutions that rely on repos and commercial paper can continue to roll over 

both of these short-term instruments as long as the demand for them is strong, but cash 

providers can withdraw funding very quickly by refusing to roll over the agreements.41 

In the period leading up to the financial crisis, broker-dealers and hedge funds relied 

heavily on repos for funding, and many more financial institutions relied on the issuance 

of commercial paper.42 On the demand side were MMFs, which invest in short-term debt 

securities with funding from investors seeking a safe, deposit-like asset. MMFs were a 

large and, before the crisis, steady source of demand for the repos and commercial paper 

that other types of financial firms were issuing in their need for short-term funding. 

Since MMFs offer their investors a stable net asset value of one dollar per share regardless 

of the value of the underlying assets, they seek to invest in safe assets. Short-term debt 

securities issued by investment banks were considered safe, and MMFs held them. 

In the summer of 2007, as mortgage defaults rose and the value of MBS fell, demand 

for the short-term instruments rapidly declined. Cash providers no longer wanted to 

U.S. Government Accountability Office, Government Support for Bank Holding Companies, GAO-14-18, 

November 2013, https://www.gao.gov/assets/660/659004.pdf. 

40 Martin Baily, Robert Litan, and Matthew Johnson, “The Origins of the Financial Crisis,” Initiative on Business 

and Public Policy at Brookings (2008), 27–31, https://www.brookings.edu/wp-content/uploads/2016/06/11_ 

origins_crisis_baily_litan.pdf. 

41 Gary Gorton, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” Federal Reserve 

Bank of Atlanta 2009 Financial Markets Conference: Financial Innovation and Crisis, 30, http://citeseerx.ist. 

psu.edu/viewdoc/download?doi=10.1.1.189.1320&rep=rep1&type=pdf. 

42 Pozsar et al., “Shadow Banking,” 35. 
CHAPTER 1: Origins of the Crisis 25 

enter into repos collateralized by MBS, fearing that if the other party to the contract (the 

counterparty) defaulted, they would be left holding an asset with a declining value. As for 

ABCP, since it was based on the cash flow from underlying mortgages and MBS, it was 

suddenly seen as more risky than before. Eventually, many banking companies with offbalance-sheet SIVs—which financed MBS and mortgage purchases by issuing ABCP— 

were forced to bring these entities onto their own balance sheets to prevent the entities’ 

insolvency and the legal and reputational damage that could result from default.43 

In late 2007 the ABCP market collapsed, and in 2008 a number of hedge funds and SIVs 

were forced to liquidate their portfolios, having become unable to roll over short-term 

debt. In the course of 2007 and into 2008, SIV balance sheets had continued to weaken, 

and liquidity had become a major issue. For highly leveraged institutions like SIVs and 

hedge funds, steep markdowns of assets under mark-to-market rules initiated increased 

margin and collateral calls. Because of the general opacity of SIVs, the increased calls on 

some SIVs prompted investor withdrawal from other, potentially safer SIVs. 

During the crisis, with illiquidity crippling the financial system, distress was 

exacerbated by the high level of leverage present in many financial institutions. Higher 

leverage amplifies gains when the assets bought with the borrowed money increase in 

value, but it also magnifies losses when the value of the assets declines.44 

Leveraged investors are required to hold some minimum level of cash or collateral 

with a broker institution to guard against losses. Financial institutions purchased assets 

on margin, holding the minimum level of cash or collateral that was required and 

borrowing most of the funds needed to purchase assets. As noted, the higher the margin, 

the higher the profits from a rise in the asset price—but the larger the losses from a price 

decline. For example, a financial institution that purchases $100 in assets with $10 of its 

own capital and $90 of borrowed funds has a leverage ratio of 10 and has purchased the 

asset at a 10 percent margin. If the value of the asset falls to $90, the firm realizes a $10 

loss and has no capital remaining. If the price falls below $90, the firm needs to sell assets 

to meet its margin requirement of 10 percent. 

As securities fall in value and losses mount, the leveraged investor is required to 

provide more cash or sell a portion of the securities. Highly leveraged firms may have 

less access to cash and be more likely to experience collateral calls or funding outflows. 

If many leveraged firms must meet these calls all at the same time and are forced to 

raise capital by selling assets whose prices are declining, the supply of assets for sale may 

increase enough to drive the price down even further. This additional drop may trigger 

additional margin and collateral calls. 

In 2007, the markdowns of assets by highly leveraged institutions caused increased 

43 Baily, Litan, and Johnson, “Origins,” 29. For a table describing the outcomes for the major structured 

investment vehicles, see Gary Gorton, “The Panic of 2007,” NBER Working Paper 14358 (2008), appendix B, 

http://www.nber.org/papers/w14358.pdf. 

44 FCIC, Final Report, xix. 
26 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

margin and collateral calls, which started a vicious cycle of falling prices and fire sales. 

According to the FCIC, in that year the major investment banks—Bear Stearns, Goldman 

Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with a 

leverage ratio as high as 40.45 This ratio indicates the magnitude of the effect that asset 

price declines had on the balance sheets of major financial institutions precisely when 

short-term funding dried up. 

Institutions in Crisis in 2008 

As described above, concerns over the exposure of financial institutions to MBS grew 

during 2007 and into 2008, and large banks reported write-downs on mortgage products. 

Starting third quarter 2007, major financial institutions—including two commercial 

banks (Bank of America and Citigroup) and four investment banks (Bear Stearns, 

Lehman Brothers, Merrill Lynch, and Morgan Stanley)—began to report declines in net 

earnings. Bear Stearns had substantial exposure to mortgages and mortgage products 

beyond the two Bear Stearns-managed hedge funds that declared bankruptcy in 2007, 

and investors grew increasingly concerned about the firm’s solvency. On March 12, 2008, 

these concerns precipitated a run on the investment bank by its hedge fund clients and 

other counterparties. The next day, the bank lost its ability to borrow in the repo market. 

To avert panic among investors, the Federal Reserve coordinated the acquisition of Bear 

Stearns by JPMorgan Chase—granting a $30 billion loan to JPMorgan to cover potential 

losses on Bear’s asset portfolio. 

In the ensuing months, a general lack of transparency in exposures to risky assets 

greatly increased uncertainty over counterparty credit risk, and fears mounted over the 

solvency of other major financial institutions.46 

Throughout the summer of 2008, persistent declines in asset values continued 

to weigh on financial institution balance sheets. Eventually, several major financial 

institutions neared insolvency. Among them were the two giant GSEs, Fannie Mae and 

Freddie Mac, which together held about $1.5 trillion in bonds outstanding. Finally, on 

September 7, 2008, growing losses and ongoing deterioration in MBS prices prompted 

Treasury Secretary Henry Paulson to put these two GSEs into federal conservatorship, 

while explicitly guaranteeing all outstanding GSE securities.47 

Within days, Lehman Brothers, another investment bank heavily exposed to MBS, 

experienced funding problems similar to those Bear Stearns had experienced. Like Bear 

Stearns, Lehman Brothers was not exceedingly large but was deeply interconnected with 

other financial institutions. Concerned about Lehman’s solvency, investors withdrew 

45 Ibid. Here the leverage ratio is expressed as a 40 to 1 multiple, meaning that for every $40 in assets, there was 

only $1 in capital to cover losses. In discussions of bank regulation, the leverage ratio is generally calculated 

as a ratio of equity to assets. 

46 Brunnermeier, “Deciphering Liquidity,” 96–98. 

47 Ibid., 89. 
CHAPTER 1: Origins of the Crisis 27 

their funds, refused repo funding, and demanded more collateral on outstanding 

commitments. On September 15, 2008, unable to meet investor demand—and without 

government assistance or the presence of an acquiring institution—Lehman Brothers 

declared bankruptcy. Lehman’s failure triggered panic throughout the U.S. and global 

financial systems. Coming on the heels of the previous stages of financial market 

turbulence, the panic resulted in one of the most severe financial crises in U.S. history. 

The ensuing panic was similar to previous financial panics in the sense that investors lost 

confidence in the financial system. Unlike the previous ones, however, this one involved 

a run on financial firms not by individual depositors but by other financial firms.48 

When exposure to mortgage-backed securities and derivatives was spread throughout 

the financial system, counterparties did not know where the risk was concentrated and 

which institution would be next to fail. Widespread uncertainty over the solvency of 

major financial institutions led investors to quickly withdraw their exposures to the 

financial sector and to hoard cash. In turn, the withdrawal of exposures and the hoarding 

of cash led to a general breakdown of intermediation—the “matching” of the funding 

market to investors by an agent or third party, such as a bank. For creditors, it was much 

easier and safer to withdraw their positions than to check the safety of their investments. 

During the weeks after Lehman’s bankruptcy, the general perceived riskiness of private 

lending to banks was reflected in a spike in interbank lending rates.49 

The day after the Lehman bankruptcy, another highly interconnected institution— 

the American Insurance Group (AIG)—also encountered an acute liquidity shortage. 

Like the investment banks, AIG was heavily involved in the credit derivatives business, 

particularly in selling CDS. AIG had issued tens of billions of dollars of CDS to insure 

against declines in asset values. It had also written CDS to protect against default on 

more than $440 billion of bonds. After Lehman declared bankruptcy, nervous investors 

demanded additional collateral on AIG’s insurance and derivatives contracts. AIG did 

not have the cash. The Federal Reserve quickly organized a rescue, providing an $85 

billion loan in exchange for an 80 percent equity stake in the company. 

After the Lehman bankruptcy, short-term funding markets, already stressed as 

described above, nearly collapsed. MMFs were one market that experienced panic and a 

run.50 Investor redemption requests on MMFs surged, causing a severe liquidity crisis. The 

Reserve Primary Fund—an MMF that held debt securities issued by Lehman Brothers— 

fell to 97 cents per share, becoming the first money market fund in 14 years to “break 

48 Gary Gorton, “Questions and Answers about the Financial Crisis,” NBER Working Paper 15787 (February 

2010), 2, http://www.nber.org/papers/w15787.pdf. 

49 FCIC, Final Report, 355. 

50 MMFs were historically perceived to be safe, liquid investment vehicles that were slightly higher-yielding 

substitutes for bank deposits. However, unlike bank deposits, MMFs were not federally insured. MMFs 

invested in short-term debt that typically included government securities, certificates of deposit, commercial 

paper, repurchase agreements, or tax-exempt securities issued by state or local governments. 
28 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

the buck” by falling below $1 per share. This event spread panic throughout the MMF 

industry, prompting MMF investors to redeem their investments. For example, Putnam 

Investments closed its $15 billion Prime Money Market Fund because of “significant 

redemption pressure.”51 During the week when Lehman Brothers declared bankruptcy, 

MMF net outflows totaled $169 billion. These outflows caused MMF funding for shortterm debt to drop, affecting sectors that relied on the funding. 

In some cases, the investment banks that sponsored MMFs stepped in to support 

MMFs facing significant redemptions. The Reserve Primary Fund, however, did not 

have a parent company that could provide support. Ultimately, the U.S. government 

provided liquidity and guarantees to the entire MMF industry. The Federal Reserve 

made liquidity available to money markets through two facilities, the Asset-Backed 

Commercial Paper Money Market Mutual Fund Liquidity Facility and the Money Market 

Investor Funding Facility, to support the commercial paper market, to help MMFs meet 

redemption requests, and to enhance money market investors’ willingness to invest in 

money market instruments. In addition, the Treasury provided a temporary guarantee 

for MMF shareholders. The guarantee lasted for one year and protected the shares of all 

MMF investors for amounts that they held in participating MMFs. The Treasury did not 

incur any losses under the program, and its actions helped stabilize the run on MMFs.52 

For the several days that followed Lehman’s bankruptcy, investors’ panic continued 

to permeate the financial markets and led to a more rapid deleveraging process to 

reduce debt on balance sheets. The process exacerbated the declines in asset values and 

spread them across all major financial markets. As noted above, the panic conditions 

were sustained by the lack of liquidity and transparency with regard to the underlying 

assets on institutions’ balance sheets. The panic led to the downfall of Washington 

Mutual (WaMu)—a major thrift institution with total assets of $307 billion, an amount 

that made it the largest bank failure in U.S. history. In the days after WaMu’s failure, 

Wachovia experienced a liquidity crisis and the federal government was prepared to 

provide assistance, but ultimately the bank was acquired by Wells Fargo without the 

assistance being necessary. The panic persisted until the government implemented a 

series of emergency measures to address the crisis (see chapter 2). Following WaMu’s 

failure, other financial institutions became illiquid or neared insolvency but were 

rescued or provided with support by the government. Among them was one of the largest 

commercial banks in the country: Citibank. Then in January the government assembled 

an assistance package for Bank of America, but it was not implemented. (For a discussion 

of Wachovia, Citibank, and Bank of America, see chapter 3.) 

The U.S. financial crisis affected investors and financial institutions around the world. 

51 Diana Henriques, “Professional Money Fund Is Closed by Putnam,” New York Times, September 18, 2008. 

52 Christian M. McNamara, “Temporary Guarantee Program for Money Market Funds,” Yale Program on 

Financial Stability, Yale School of Management, January 13, 2016. 
CHAPTER 1: Origins of the Crisis 29 

Many foreign financial entities (including foreign banks, governments, and sovereign 

wealth funds) had invested directly or indirectly in U.S. mortgage derivatives.53 Even 

emerging market economies—with financial systems less exposed to the U.S. financial 

system and relatively little exposure to mortgage derivatives—were affected by the fallout 

from the crisis, experiencing the economic aftershock as global trade declined drastically 

and as foreign investors, who had become extremely risk averse, pulled out of their 

investments in emerging markets. Figure 1.7 shows the severity of the crisis across major 

global markets from January 2007 through September 2010. 

Figure 1.7. Markets Heat Map 

Subprime RMBS
 

Money Markets
 

Global Financial
 

Institutions 

Commercial MBS 

Prime RMBS 

Corporate Credit 

Advanced 

Sovereigns 

Emerging Markets 

2007 2008 2009 2010 

Source: International Monetary Fund, October 2010.
 

Note: The heat map measures both the level and one-month volatility of the spreads, prices, and total returns of each asset 


class relative to the average during 2003–2006 (i.e., wider spreads, lower prices and total returns, and higher volatility). The 


deviation is expressed in terms of standard deviations. Light green signifies a standard deviation under 1, yellow signifies 1 


to 4 standard deviations, orange signifies 4 to 9 standard deviations, and red signifies greater than 9 standard deviations. 


MBS = mortgage-backed security; RMBS = residential mortgage-backed security. 


53 International Monetary Fund, “Crisis and Recovery,” World Economic Outlook, April 2009, 101. 
30 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Conclusion 

The housing market expansion of the 2000s masked deeply rooted vulnerabilities in the 

financial system that were exposed when house prices stopped rising and began falling. 

Conditions that contributed to a housing bubble of historic proportions were ample 

liquidity, strong demand for high-yielding financial assets, financial deregulation, loose 

underwriting standards for mortgages, and financial innovation. Double-digit increases 

in nationwide house prices and cheap credit attracted homebuyers into the housing 

market, as well as speculative real estate investors intent on making short-term gains. 

When house prices fell and mortgage terms changed, borrowers began to default on 

their mortgages, institutional investors pulled out of buying mortgage-backed securities, 

and financial institution balance sheets began to deteriorate as asset values weakened. 

For some institutions, the stress was so great that it threatened their continued viability. 

Though the crisis began with the bank and nonbank lenders who originated highrisk, often inappropriate mortgage loans to borrowers, it spread across the securitization 

chain, involving many different financial institutions. The securitization of nontraditional 

mortgage products was conducted by large investment banks, thrifts, and commercial 

banking organizations, with private label securitizations constituting a growing share 

of the product. A number of these financial institutions relied on short-term funding to 

finance the purchase of long-term securities, which the institutions later sold to other 

financial institutions. Some of the financial institutions involved in these activities were 

highly leveraged, and the subsequent decline in housing prices made clear the extent 

of credit risk and liquidity risk that these institutions had taken on. Simultaneous 

deleveraging by many firms amplified the fire sales of assets and further depressed asset 

prices. One by one, major investment banks were acquired (Bear Stearns and WAMU) 

or failed (Lehman Brothers) or converted to bank holding companies (Goldman Sachs 

and Morgan Stanley).54 

With Lehman Brothers’ bankruptcy, the markets realized that government bailouts 

were not guaranteed, and concerns grew about which major institution would be the next 

to fail. What had begun as an overheated homebuyers’ market ended up reverberating 

throughout the U.S. financial markets and well beyond, affecting the global financial 

system and pushing the U.S. economy into the Great Recession. 

54 Becoming a bank holding company means becoming subject to regulation and supervision by the Federal 

Reserve. 
CHAPTER 1: Origins of the Crisis 31 

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———. The Financial Crisis Inquiry Report: Final Report of the National Commission on the 

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———. “The Subprime Panic.” European Financial Management 15, no. 1 (January 2009): 

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———.“Slapped in the Face by the Invisible Hand: Banking and the Panic of 

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———. “Questions and Answers about the Financial Crisis.” NBER Working Paper 15787, 

February 2010. http://www.nber.org/papers/w15787.pdf. 
32 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Henriques, Diana. “Professional Money Fund Is Closed by Putnam.” New York Times, 

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2
 

The Temporary Liquidity Guarantee 

Program: A Systemwide Systemic 

Risk Exception 

Introduction 

During the unprecedented financial-market disruptions in the United States and abroad 

in the fall of 2008, government officials took extraordinary measures to calm market 

fears and encourage lending. One of these measures was the Federal Deposit Insurance 

Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP). The TLGP had 

two components. It provided a limited-term guarantee for certain newly issued debt 

not only of banks and thrifts but also of bank, thrift, and financial holding companies 

and eligible bank affiliates (the Debt Guarantee Program, or DGP). Additionally, the 

TLGP fully guaranteed certain non-interest-bearing transaction deposit accounts (the 

Transaction Account Guarantee Program, or TAGP). 

During the first half of October 2008, U.S. policymakers made the decision to 

implement these programs and achieved consensus both about the mechanism for 

creating them and about the policy trade-offs involved in their design. During this same 

short period, the FDIC worked to ensure that the two voluntary programs would be in 

place at the time of their announcement on October 14, and during the last months of 

2008, the FDIC refined the programs to increase their effectiveness. 

Of the approximately 14,000 entities eligible to participate in the DGP, about half 

opted into the program (though almost all the debt guaranteed was issued by fewer than 

50 such entities), and a significant majority of eligible institutions signed on to the TAGP. 

At their height, the DGP guaranteed almost $350 billion in outstanding debt and the 

TAGP covered over $800 billion in deposits. The programs were designed in such a way 

that expected fees would cover potential losses, but as it turned out, the fees charged to 

participating entities far outstripped the losses attributable to the TLGP as a whole.1

 The 

DGP ended on October 31, 2009, a year after its introduction (though guaranteed debt 

If the TLGP’s fees had been insufficient to cover losses, a systemic risk assessment would have been levied on 

all insured institutions; see the section below titled “The TLGP: Effects and Costs.” 

1 
34 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

remained outstanding until 2012). The TAGP, after two extensions, ended on December 

31, 2010. The TLGP proved effective in stabilizing financial markets, with the DGP 

reopening frozen debt markets to participating entities and the TAGP stabilizing deposit 

funding for insured depository institutions. 

The Policy Debate in October 2008 

With financial markets in turmoil, governments around the world sought to formulate 

and coordinate responses designed to return stability to those markets. In the United 

States and many other countries, the responses involved guaranteeing debt issued by 

banks and expanding deposit insurance coverage. In the United States, these two courses 

of action occasioned a policy debate among financial regulators, leading to the decision 

to use the systemic risk exception under the Federal Deposit Insurance Corporation 

Improvement Act of 1991 as the mechanism for providing the debt guarantees and the 

increased deposit insurance coverage. The box titled “The Systemic Risk Exception: 

Origins, Definition, and Procedure” provides background on the systemic risk exception. 

The G7’s Response to the Financial Crisis: Implications for the United States 

Faced with badly deteriorating conditions in financial markets, the Group of Seven 

finance ministers met in Washington, DC, and developed a plan to address these 

problems, focusing on liquidity, capital, and market stability. The plan was announced 

on October 8, 2008, and one of its goals was to “take all necessary steps to unfreeze 

credit and money markets and ensure that banks and other financial institutions have 

broad access to liquidity and funding.”2

 To achieve this goal, the governments of many 

advanced economies decided to guarantee debt issued by banks and other financial 

institutions, and to expand deposit insurance guarantees.3 

Given the frozen credit and money markets and the need to coordinate with the 

international response to the financial crisis, the United States had to determine what 

mechanism was appropriate for guaranteeing bank debt. The U.S. Treasury Department 

2	 See G7 Finance Ministers, “G7 Finance Ministers and Central Bank Governors Plan of Action,” October 

10, 2008, http://www.g8.utoronto.ca/finance/fm081010.htm. The members of the Group of Seven are the 

United States, Canada, France, Germany, Italy, Japan, and the United Kingdom. 

3	 In addition to the program in the United States, some form of debt guarantee was put in place in Australia, 

Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, the Netherlands, New 

Zealand, Portugal, Spain, Sweden, and the United Kingdom. See Sebastian Schich, “Expanded Government 

Guarantees for Bank Liabilities: Selected Issues,” OECD Journal: Financial Market Trends, 2009, no. 1, 5, 

http://www.oecd.org/finance/financial-markets/42779438.pdf. For the expansion of deposit insurance 

coverage internationally, see International Association of Deposit Insurers, “Discussion Paper on Cross 

Border Deposit Insurance Issues Raised by the Global Financial Crisis,” March 2011, 13–15, http://www.iadi. 

org/en/assets/File/Papers/Approved%20Research%20-%20Discussion%20Papers/IADI_CBDI_Paper_29_ 

Mar_2011_(Final_for_publication).pdf. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 35 

(Treasury) later stated that if the United States were not to take actions similar to those 

being undertaken in Europe, “global market participants might turn to institutions and 

markets in countries where the perceived protections were the greatest.”4 

The Policy Response by U.S. Financial Regulators 

For approximately ten days in October, primarily over the weekend of October 11 and 12, 

senior officials from the FDIC, the Federal Reserve System, and Treasury debated how 

to respond to the paralysis throughout the credit markets. These officials had to reach 

agreement on what mechanism would be appropriate for guaranteeing bank debt, if any, 

and they had to agree on the extent of a transaction account guarantee. Guaranteeing bank 

debt was seen as the more consequential of the two actions, for two reasons. First, large 

banks needed access to the debt markets, and needed it right away. Second, guaranteeing 

bank debt would be an unprecedented foray into a type of guarantee that was totally new 

for the FDIC, whereas extending the deposit guarantee would be an incremental change. 

Underpinning the need to agree on the mechanism for guaranteeing bank debt and 

on the details for extending deposit coverage was the need to choose the resources that 

would stand behind these guarantees. The FDIC’s resources would clearly back insured 

deposits, but the debt guarantee was more problematic. One possible channel of funds 

was an appropriation by Congress. However, policymakers believed that Congress would 

not authorize funds over and above those it had—most reluctantly—just provided to 

the Troubled Asset Relief Program (TARP). Policymakers also considered TARP itself 

an unlikely source of funding for the debt guarantee. In addition, they believed that the 

Federal Reserve Board (FRB) had no authority to guarantee bank debt directly.5

 In their 

view, the only available method of providing broad guarantees of bank debt (and the only 

way to expand deposit insurance coverage without congressional action) was to use the 

systemic risk exception (SRE), which allowed open-bank assistance through the FDIC.6 

4 U.S. GAO, Federal Deposit Insurance Act: Regulators’ Use of Systemic Risk Exception Raises Moral Hazard 

Concerns and Opportunities Exist to Clarify the Provision, GAO-10-100, 2010, 18, http://www.gao.gov/ 

products/GAO-10-100. For discussion of the scope and design of foreign debt-guarantee programs, often 

in comparison with the U.S. program, see Schich, “Expanded Government Guarantees”; Fabio Panetta et 

al., “An Assessment of Financial Sector Rescue Programmes,” BIS Papers 48, 2009, http://www.bis.org/publ/ 

bppdf/bispap48.pdf; Aviram Levy and Sebastian Schich, “The Design of Government Guarantees for Bank 

Bonds: Lessons from the Recent Financial Crisis, OECD Journal: Financial Market Trends, 2010, no. 1, https:// 

www.oecd.org/finance/financial-markets/45636972.pdf; Aviram Levy and Andrea Zaghini, “The Pricing of 

Government-Guaranteed Bank Bonds,” Banks and Bank Systems 6, no. 3 (2011), https://businessperspectives. 

org/media/zoo/applications/publishing/templates/article/assets/js/pdfjs/web/4126; and Giuseppe Grande et 

al., “Public Guarantees on Bank Bonds: Effectiveness and Distortions,” OECD Journal: Financial Market 

Trends, 2011, no. 2, 47–72, http://www.oecd.org/finance/financial-markets/49200208.pdf. 

5 See Sheila Bair, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself 

(2012), 113; Timothy Geithner, Stress Test: Reflections on Financial Crises (2014), 226; and Ben S. Bernanke, 

The Courage to Act: A Memoir of a Crisis and Its Aftermath (2015), 340. 

6 The TLGP was not the only use of the systemic risk exception during the financial crisis. For its application in 

the cases of the individual financial institutions Wachovia, Citigroup, and Bank of America from September 
36 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The Systemic Risk Exception: Origins, Definition, and Procedure 

The roots of the SRE can be found in concerns that FDIC resolutions during the 

banking crisis of the 1980s and early 1990s had frequently protected uninsured 

depositors and creditors in addition to insured depositors. In February 1991, a 

congressionally mandated study of the deposit insurance system recommended 

that the FDIC should, in order to minimize the cost of resolving failed banks, seek 

to limit its protection to insured depositors whenever possible. To accomplish this 

goal, any failed-bank resolution was to be undertaken at the least cost to the deposit 

insurance fund. The study noted, however, that “the presence of systemic risk could 

require a decision to protect uninsured depositors even if it is not the least costly 

resolution method.” Although the report acknowledged the FDIC’s practice of 

consulting both the Board of Governors of the Federal Reserve System (FRB) and 

Treasury when it chose to protect uninsured depositors, the report stated that a 

systemic risk decision demanded “a broader government consensus that systemic 

risk exists and requires extraordinary government action” and recommended that 

the FRB and Treasury jointly make a systemic risk determination if they agreed on 

the need to protect uninsured depositors.a 

Congress incorporated the systemic risk determination into the Federal Deposit 

Insurance Corporation Improvement Act of 1991 (FDICIA), but amended the 

regulatory process that Treasury recommended.b Unless the SRE was invoked, 

FDICIA prohibited protection for uninsured depositors and other creditors if 

protecting those depositors and creditors would increase a resolution’s cost to the 

deposit insurance fund. It also required that the decision to grant an SRE be made 

by the Secretary of the Treasury in consultation with the President, but only after 

a written recommendation by a two-thirds majority of both the FDIC Board of 

Directors and the FRB. After an SRE determination was made, the FDIC would be 

authorized to act or assist as necessary to avoid the potential adverse effects of a 

major-bank failure. The SRE was not used until 2008. 

a See U.S. Department of the Treasury, Modernizing the Financial System: U.S. Treasury Department 

Recommendations for Safer, More Competitive Banks (1991), especially 27–28. 

b For policymakers’ views on the SRE as it was being considered, see Economic Implications of the 

“Too Big to Fail Policy,” Hearing Before the U.S. House of Representatives, Subcommittee on Economic 

Stabilization, Committee on Banking, Finance, and Urban Affairs, 102nd Cong. (1991). 

By October 13, after days of intense negotiation, the agencies reached agreement on 

the basic elements of the emergency program to guarantee bank debt and insure a broad 

subset of transaction deposits. The agreement immediately set in motion the process of 

requesting a systemic risk determination, in keeping with the procedure set forth in the 

2008 through January 2009, see chapter 3. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 37 

Federal Deposit Insurance Corporation Improvement Act of 1991: the FDIC Board and 

the FRB voted to recommend a systemic risk exception to the Secretary of the Treasury, 

and the Secretary—after consulting with the President—quickly determined that a 

systemic risk existed. 

The resulting program—the two-part Temporary Liquidity Guarantee Program 

(TLGP)—was announced on October 14 in a joint press conference by the FDIC, 

the U.S. Treasury Department, and the Federal Reserve. In announcing the program, 

FDIC Chairman Sheila Bair emphasized that it was needed to stabilize the financial 

system and that it would be funded through fees charged to participating financial 

institutions, not taxpayers and not the Deposit Insurance Fund (DIF), which was 

intended to protect the deposits of bank customers.7

 The TLGP was a crucial element 

of a three-part U.S. government response to the financial crisis. The other two parts 

were the Treasury’s capital injections into banks under the TARP, and the Commercial 

Paper Funding Facility (CPFF) under the aegis of the FRB. The three programs were 

designed to work together.8 

Policy Discussions: The Details of the TLGP 

To reach agreement about the details of the debt guarantee program, policymakers 

had to resolve several complex issues.9

 One was whether to guarantee bank debt that 

was already outstanding. There was concern that such a broad guarantee might prove 

too large a liability to cover and might create a windfall for those institutions that had 

invested in bank debt, but arguments were also made that the guarantee needed to be as 

wide as possible. Another issue was whether to guarantee debt issued by bank holding 

companies (BHCs) and their nonbank affiliates. Some worries were expressed that there 

might have been legal impediments to guaranteeing such debt, and questions were raised 

about whether such a guarantee was in fact desirable. However, the view was also held 

that not guaranteeing debt issued by BHCs would leave U.S. banks at a competitive 

disadvantage, since European debt guarantee programs would cover the debt issued by 

the large universal banks in those countries. A third area of debate was whether to assess 

a fee for guarantees, and a fourth was whether creditors should bear any loss on bonds 

whose issuers defaulted. On the question of fees charged to entities that would issue 

guaranteed debt, there was agreement that a fee should be assessed but a spectrum of 

opinion on how much the fee should be. Arguments were made for (1) a minimal fee 

7 See FDIC, “Statement by FDIC Chairman Sheila Bair,” FDIC Joint Press Conference with U.S. Treasury and 

Federal Reserve, Press Release, October 14, 2008, https://www.fdic.gov/news/news/press/2008/pr08100a. 

html. 

8 For an overview of the CPFF, see Tobias Adrian et al., “The Federal Reserve’s Commercial Paper Funding 

Facility,” Federal Reserve Bank of New York Economic Policy Review, May 2011, 25–39. 

9 This discussion is based on Bair, Bull by the Horns, 109–20; Geithner, Stress Test, 226–38; and Bernanke, The 

Courage to Act, 339–42. 
38 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

to encourage participation, (2) a fee calibrated to replicate funding costs during normal 

market conditions, and (3) a fee that took into account the cost of potential defaults. 

As for creditors bearing loss if a bond issuer defaulted, an early proposal suggested that 

creditors bear a 10 percent loss on such bonds, but many policymakers viewed this as 

undercutting the purpose of the guarantee. 

In the end it was agreed that the debt guarantee program would cover only newly 

issued debt and for a limited range of maturities. BHC debt would be covered, but with 

a limitation on thrift holding companies’ ability to participate in the debt guarantee 

program and with the proviso that the FDIC would approve applications for guarantees 

of debt issued by nonbank affiliates of BHCs on a case-by-case basis. These restrictions 

were necessitated by the large number of thrift holding companies and BHC affiliates 

and the attendant difficulty in assessing the risk to the FDIC from guaranteeing their 

debt. The costs to program participants would be low but meaningful, and creditors 

would not face a loss on bonds whose issuers defaulted. 

To reach agreement on the expansion of deposit insurance coverage, policymakers had 

to decide whether to expand deposit insurance coverage beyond what the FDIC already 

offered and, if so, to what extent. Bank deposits were an important form of liquidity for 

many smaller banks, and such banks faced risk from potential runs by entities holding 

deposits above the insurance limit, such as small businesses and municipalities. To 

forestall such runs, the FDIC had argued several weeks earlier that the agency should 

extend an unlimited guarantee to transaction accounts at banks, believing that such 

a guarantee would promote public confidence in banks, but at that time the proposal 

for such a guarantee was not adopted. It was later noted that there had been a general 

opposition to such an expansion of deposit insurance because of moral hazard, but that 

during the crisis, expansion of the insurance guarantee was thought to be warranted 

because, without it, there could be rapid deposit outflows from smaller banks into banks 

that were perceived to be too big to fail. 

In the end, the proposal for an unlimited guarantee of transaction accounts at banks 

was agreed to as part of the TLGP. The policymakers therefore ended up striking a 

balance among their varying views on providing these two forms of assistance to the 

financial system. 

The Case for a Systemic Risk Exception 

At the same time that these policy discussions were being held, FDIC staff was 

gathering data and other information to support the case for a systemic risk exception. 

The information was assembled in a memorandum that the FDIC Board would 

consider before voting on the issue.10 The memorandum documented the growing and 

10 This section is largely based on that memo: FDIC, “Memorandum to the Board of Directors: FDIC Guarantee 

of Bank Debt,” October 13, 2008. For further discussion of the events and trends during the second half of 

2008, see chapter 1. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 39 

unprecedented disruption in credit markets and the concomitant effects on banks’ ability 

to obtain funding and to extend credit. Banks had responded to the crisis by retaining 

cash and tightening lending standards. Borrowing by businesses, households, and state 

and local governments had slowed significantly, and the trend was likely to continue. 

The interbank market as defined by the TED (Treasury-Eurodollar) spread was normally 

stable at just below 25 basis points (bps), but the spread had been rising significantly 

since 2007; by August 2008 the spread had risen to 238 bps, and by October 9, to 415 bps 

(see Figure 2.1). At this level almost no interbank lending was taking place, and banks 

had ceased lending in the federal funds market.11 

Figure 2.1. Interbank Lending Spreads, December 2006–December 2010 

Percent 

5 

4 

3 

2 

1 

0 

-1 

Weekly 

Source: Federal Reserve Bank of St. Louis. 

Dec-06 

Jun-07 

Dec-07 

Jun-08 

Dec-08 

TED Spread 

LIBOR-OIS 1-Month Spread 

Jun-09 

Dec-09 

Jun-10 

In addition, since Lehman Brothers Holdings, Inc., filed for bankruptcy, on 

September 15, even creditworthy companies had been having difficulty successfully 

issuing commercial paper, especially at longer maturities, and any debt that was being 

issued carried extremely high interest rates even for very short-term instruments. 

11 The federal funds market allowed commercial banks that had excess reserves on deposit at regional Federal 

Reserve banks to lend those funds to financial institutions that had liquidity needs. 
40 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Securitization markets for both residential and commercial mortgage-backed securities 

had essentially shut down, and issuances of other types of asset-backed securities 

had also fallen drastically. Flight to safety had greatly increased Treasury “fails” (the 

failure to deliver Treasury securities), demonstrating both increased demand for U.S. 

government securities and the scarcity of these securities. 

Short-term funding markets in particular were essentially frozen, and in this 

environment many banks and BHCs found it hard to replace funding at a reasonable 

cost. The short-term funding channels that were normally available to financial 

institutions had become problematic and expensive, when they were available at all. 

Figure 2.2 shows the unusual length of time during which almost no bank senior 

unsecured debt was issued after the Lehman bankruptcy. Had the TLGP not been 

implemented, that situation could have continued. 

In addition, the FDIC had examined the effect that a 5 percent run on uninsured 

deposits would have on economic activity and found that a stressed environment could 

reduce GDP growth by nearly 2 percent per year, a reduction that could either create or 

prolong a recession.12 Although no evidence suggested that such a large run was happening, 

uninsured deposits were leaving banks that were perceived to be troubled, and the FDIC 

had anecdotal evidence that even healthy banks were experiencing deposit outflows. 

Figure 2.2. Trends in Senior Unsecured U.S. Bank Debt Issuance before and after 

September 2008 

0 

2 

4 

6 

8 

10 

12 

14 

16 Issued under TLGP 

Senior Unsecured 

Billions of Dollars 

0 

2 

4 

6 

8 

10 

12 

14 

16 

2005 2006 2007 2008 

Lehman Bankruptcy: 

September 15, 2008 

Jan 2008 Apr 2008 Jul 2008 Oct 2008 

Source: Bloomberg. 

12 See 73 Fed. Reg. 64180 (Oct. 29, 2008). 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 41 

The Systemic Risk Exception Reinterpreted 

Before the 2008 crisis, policymakers and industry observers generally thought that 

FDICIA’s systemic risk exception was intended to apply to an individual troubled 

institution. The situation that policymakers were confronting in 2008, however, 

involved not only the possible failure of a single institution, or even of a single market, 

but dysfunction throughout much of the financial system. These circumstances led 

policymakers to reexamine the scope of the systemic risk exception. 

Their rationale for viewing the systemic risk exception as appropriate in this set of 

conditions was, first, that the intent of the proposed two-part TLGP was to mitigate 

the effects of credit market disruption and lessen the losses to the FDIC that would 

likely result from inaction. Second, safeguards were built into the two component 

programs: the guarantees would be limited in duration and scope; the programs would 

be industry funded, with a fee structure that was expected to protect the DIF; and 

the participating institutions would be subject to careful oversight. Finally, the total 

proposed program was integral to the overall three-part U.S. response to systemic risk 

in the banking system (as noted above, the other two parts were the Treasury’s TARP 

capital infusions and the Federal Reserve’s CPFF). 

The FDIC’s Board of Directors, while unanimously approving the systemic risk 

exception and strongly supporting the TLGP, was well aware that the agency was 

heading into new territory: then Vice Chairman Martin Gruenberg remarked that “this 

action being proposed today ... is perhaps the most extraordinary ever taken by an 

FDIC Board.” Given the innovative nature of the action, House and Senate leaders had 

been consulted in advance about the steps the regulatory agencies were going to take 

and their support was obtained. More than one Board member observed that Congress 

would need to examine the statutory framework of the systemic risk exception to see if 

the exception as originally conceived was adequate to cover circumstances not foreseen 

in 1991, when the law was written.13 The box titled “Questions about the Statutory 

Authority for the TLGP” discusses the legal underpinnings for the guarantees provided 

by the FDIC under the new program. 

Questions about the Statutory Authority for the TLGP 

In 2010, the U.S. Government Accountability Office (GAO) examined the use of 

the systemic risk exception in 2008–2009. The report noted that the height of the 

financial crisis was the first time the government had used the exception and that 

the TLGP was created at a time of “volatile economic circumstances.” 

continued 

13 FDIC, Board of Directors Meeting Minutes (Oct. 13, 2008). 
42 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The report went on to explain that the agencies (the FDIC, FRB, and Treasury) 

believed that FDICIA as drafted was unclear on how the systemic risk determination 

should be applied. Holding this belief, they thought the law’s provisions could 

be interpreted to allow a systemic risk determination when either the banking 

industry as a whole or just a single institution was in danger of causing the entire 

financial system to collapse. Moreover, the agencies believed that “a systemic risk 

determination waives all of the normal statutory restrictions on FDIC assistance, as 

well as creating new authority to provide assistance, both as to types of aid provided 

and as to the entities that may receive it.” Given these interpretations, the agencies 

chose to make what they called a “generic systemic risk determination.” They 

based their choice on two assumptions about bank-by-bank assistance: it would be 

ineffective, and it would be more costly to the FDIC than would the TLGP. 

The GAO acknowledged that it found some support for the agencies’ positions 

that the systemic risk exception could be used both to authorize the TLGP and to 

provide assistance of the scope that the TLGP provided, but the GAO also found 

that the agencies’ interpretations were open to question and raised significant policy 

issues. The report recommended that Congress clarify the statutory language about 

the requirements for, and assistance provided under, a systemic risk exception.a 

Congress revised the language as part of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act in July 2010 (see the conclusion of this chapter). 

a For a detailed analysis, see U.S. GAO, Federal Deposit Insurance Act: Regulators’ Use of Systemic Risk 

Exception (2010), 43–57. 

The Creation of the TLGP and Initial Participation 

The TLGP was a complex program that needed to be created quickly. Normally any 

FDIC program, let alone one entirely new for the agency, would go through a relatively 

long rulemaking process before being put in place. But because of the emergent nature 

of the financial crisis, the TLGP took effect as soon as it was announced, on October 

14; the announcement was based on the FDIC’s best attempts to assemble an intricate 

program during the first two weeks in October. Immediately after announcing the two 

component programs of the TLGP, the FDIC briefed potential participants on how the 

Corporation expected the programs to work.14 

Just two weeks later, on October 29, the FDIC issued an interim final rule that 

elaborated on the broad outlines and specific elements previously presented, and at the 

same time the agency sought comments, though on a much more expedited schedule 

14 The transcripts of the conference calls can be found at https://www.fdic.gov/regulations/resources/tlgp/ 

archive.html. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 43 

than usual.15 The interim final rule was amended on November 7 (again with a request 

for comments), and the final rule was adopted on November 21, only five weeks after the 

TLGP had been announced.16 Many of the comments helped improve the effectiveness of 

the program, particularly the debt guarantee component, as a tool for bringing stability 

to the financial markets.17 

The TLGP was structured as a voluntary program. When it began, all eligible entities18 

were automatically enrolled for the first 30 days at no cost, after which fees would be 

assessed to participants, and eligible entities would be allowed to opt out of either the Debt 

Guarantee Program (DGP) or the Transaction Account Guarantee Program (TAGP) or 

both.19 To eliminate an adverse selection problem (only the weakest entities would opt in, 

while stronger ones would opt out), all entities within a holding company were required to 

make the same decision about the DGP. 

More than half of the over 14,000 eligible entities decided to remain in the DGP during 

its initial period (the DGP would later be extended beyond its initial period, as discussed 

below), and more than 7,100 banks and thrifts, or 86 percent of FDIC-insured institutions, 

decided to remain in the TAGP. Most of the institutions that opted out of the DGP were 

those that had less than $1 billion in assets and issued no appreciable amount of senior 

unsecured debt. In addition, the FDIC placed restrictions on many entities’ participation 

in the DGP (see the next section for more detail). 

15 If an agency has enough reason to issue a final rule without first publishing a proposed rule, such a rule 

is often called an interim final rule; this kind of rule becomes effective on publication, but an agency may 

amend it later in response to public comments, as was the case with the TLGP interim final rule. 

16 See 73 Fed. Reg. 64179 (Oct. 29, 2008); 73 Fed. Reg. 66160 (Nov. 7, 2008); and 73 Fed. Reg. 72244 (Nov. 26, 

2008). 

17 Some of the most significant changes made in response to comments were the following: the definition 

of senior unsecured debt was revised; an alternative cap was provided for banks that had either no senior 

unsecured debt outstanding or only fed funds purchased; the debt guarantee limits of a participating insured 

depository institution and its parent BHC were combined; the timely payment of principal and interest 

following payment default was guaranteed; and the transaction accounts guarantee was broadened to cover 

both Interest on Lawyers Trust Accounts (IOLTAs) and negotiable order of withdrawal (NOW) accounts. 

Many of these changes are discussed below in the sections on the DGP and the TAGP. 

18 Eligible entities were (1) an insured depository institution; (2) a U.S. bank holding company, provided 

that it controlled (directly or indirectly) at least one subsidiary that was a chartered and operating insured 

depository institution; (3) a U.S. savings and loan holding company (with certain limitations), provided 

that it controlled (directly or indirectly) at least one subsidiary that was a chartered and operating insured 

depository institution; and (4) any other affiliates of an insured depository institution that the FDIC in its 

discretion designated an eligible entity. See 73 Fed. Reg. 64181 (Oct. 29, 2008) and 73 Fed. Reg. 72266 (Nov. 

26, 2008). 

19 When the nine largest banks were informed on the afternoon of October 13 that they had to accept capital 

infusions under TARP, they were also told that they had to opt in to the DGP. See Henry Paulson, On the 

Brink: Inside the Race to Stop the Collapse of the Global Financial System (2010), 364. Several months later, 

one observer would note that while some of the largest banks eagerly sought to exit the TARP, they were 

not similarly eager to abandon the TLGP. See Andrew Bary, “How Do You Spell Sweet Deal? For Banks, It’s 

TLGP,” Barrons, April 20, 2009. 
44 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The Debt Guarantee Program 

The DGP provided liquidity by guaranteeing participating entities’ newly issued senior 

unsecured borrowing, thereby allowing participants to roll over maturing debt or issue 

additional debt. 

Ground Rules and Extensions 

The program excluded certain types of debt instruments, as it was specifically designed not 

to encourage exotic or complex funding structures and not to protect lenders who sought 

to make risky loans.20 Generally the FDIC capped guaranteed debt issuance at 125 percent 

of an entity’s senior unsecured debt that was outstanding as of September 30, 2008, and 

was scheduled to mature on or before June 30, 2009. The cap was set at this level to allow 

participants to roll over existing debt and have some room for their debt issuance to grow. 

For entities with no senior unsecured debt outstanding as of September 30, 2008, or with 

only federal funds outstanding, the limit was set at 2 percent of consolidated total liabilities 

as of September 30, 2008. 

As a condition of participation in the program, entities agreed to comply with any 

FDIC request that they provide relevant information about their debt issuances under 

the program. Another condition was that entities agreed to be subject to periodic FDIC 

on-site reviews (after the FDIC consulted with the appropriate federal banking regulator) 

to determine the entity’s compliance with the terms and requirements of the DGP. The 

FDIC also had discretion to terminate an entity’s continued participation in the DGP 

after consulting with the entity’s primary federal regulator.21 

Initially the DGP allowed participating entities to issue guaranteed debt until June 30, 

2009, with the guarantee set to expire on the earlier of the maturity of the debt or June 

30, 2012. In May 2009, however, the FDIC extended the program to reduce potential 

market disruption and to facilitate an orderly phase-out of the program.22 The issuance 

deadline was extended four months, to October 31, 2009, and the guarantee period 

was extended six months, expiring December 31, 2012. Participating entities that had 

issued DGP debt on or before April 1, 2009, could use the extension automatically, 

but others had to receive FDIC approval to use it. No entities that had opted out of the 

20 Debt eligible for the guarantee included federal funds purchased, promissory notes, commercial paper, 

unsubordinated unsecured notes (including zero-coupon bonds), and certain U.S. dollar-denominated 

certificates of deposit. From the program’s inception through December 5, 2008, the DGP covered debt with 

a maturity of 30 days or less, but in response to comments on the interim rule, the FDIC excluded debt with 

a maturity of 30 days or less and focused on stable, longer-term sources of funding, where liquidity was most 

lacking. The DGP was extended in 2009 to cover mandatory convertible debt. See 74 Fed. Reg. 9522 (Mar. 4, 

2009). The guarantee for such debt was set to expire on the earlier of the maturity of the debt, the conversion 

date, or June 30, 2012. 

21 Both the on-site review authority and the termination authority were rarely used. 

22 74 Fed. Reg. 26521 (Jun. 3, 2009). 
45 

Oct-08 Dec-08 Feb-09 Apr-09 Jun-09

Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12

Aug-12 Oct-12 

CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 

initial phase were permitted to make use of the extension. Debt outstanding over the 

course of the program is presented in Figure 2.3. 

Figure 2.3. DGP Debt Outstanding, October 2008–December 2012 

Billions of Dollars 

0 

50 

100 

150 

200 

250 

300 

350 

400 

Pricing and Limits on Participation 

To compensate for the FDIC’s risk, entities that issued debt were assessed fees. Initially the 

Corporation proposed an annualized flat-rate 75 basis point fee, after determining (by using 

credit default swap [CDS] spreads) that that amount would be substantially above the cost 

of “normal” credit protection but much lower than the very wide CDS spreads in October 

2008. This proposed fee structure was the product of consultation with the Federal Reserve 

and Treasury. In response to industry comments, however, the FDIC altered the flat-rate 

fee to a sliding fee schedule, with fees ranging from 50 to 100 basis points, increasing for 

longer-maturity debt.23 In addition, for holding companies whose affiliated banks’ assets 

constituted less than half of the holding company’s consolidated assets, the FDIC increased 

DGP fees by 10 basis points. Finally, in conjunction with the program’s extension in May 

2009, the FDIC added a surcharge to the guarantee fee on debt with a maturity of one 

23 An annualized fee of 50 basis points was applied to debt with a maturity of 180 days or less. The fees increased 

to 75 basis points for debt with a maturity of 181 to 364 days, and to 100 basis points for debt with a maturity 

of 365 days or more. 73 Fed. Reg. 72244 (Nov. 26, 2008). 
46 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

year or greater issued after April 1, 2009. The surcharge varied depending on the type of 

institution issuing the debt, with banks paying the lowest fees.24 

Some economists have suggested that the FDIC might have been better served by adopting 

a more discriminating pricing method, such as the market-based pricing mechanisms used 

by many similar European programs. For example, pricing for the UK program started 

with a flat base charge supplemented by an institution’s median five-year CDS spread in 

2007, the year before the program’s implementation. One study, using a sample of banks in 

both countries (U.S. and UK), calculated a “fair price” for the guarantee by using an average 

three-year CDS spread in November 2008, and compared the calculated fair price with the 

average UK guarantee fee and with the flat U.S. fee. The study found that the average UK fee 

was higher than the average calculated fair price (133.7 bps vs. 109.6 bps) but that the flat 

U.S. fee was substantially lower than the calculated fair price (75 bps vs. 255.4 bps).25 These 

results imply that the U.S. DGP provided a large subsidy to U.S. banks. A later study sought 

to quantify the subsidy, using a sample of almost $200 billion in guaranteed debt issued by 

six large U.S. entities. The study found that the six institutions saved almost $20 billion over 

the life of the bonds compared with what they would have spent for nonguaranteed debt; in 

other words, they saved substantially more than they paid the FDIC for the guarantee.26 As 

mentioned above, when the FDIC extended the DGP for four months beyond the original 

intended expiration of the program, surcharges were added for certain types of guaranteed 

debt, not only to encourage banks to exit the program but also to “reduce the subsidy 

provided by the DGP.”27 

It is important to understand that pricing was not the only tool the FDIC had available 

to address DGP-related risks. Not all institutions were permitted to participate in the DGP, 

and the FDIC limited others’ ability to do so. Specifically, the rule implementing the DGP 

permitted the FDIC, working with an entity’s primary federal regulator, to make exceptions 

to the entity’s debt guarantee limit—to increase, reduce, or restrict in some way the entity’s 

24 The surcharge was intended to compensate members of the Deposit Insurance Fund (DIF) (including those 

that did not issue FDIC-guaranteed debt) for bearing the risk that TLGP fees would be insufficient and that, 

as explained in the section below on the TLGP’s effects and costs, a systemic risk assessment would be levied 

on all insured institutions. Unlike the initial DGP guarantee fees, which were reserved for possible DGP 

losses and segregated from the DIF, the amount of any surcharge collected in connection with the extended 

DGP was to be deposited into the DIF and used by the FDIC when calculating the fund’s reserve ratio. See 

74 Fed. Reg. 26521, 26523 (Jun. 3, 2009). For an explanation of the fund’s reserve ratio, see chapter 5. 

25 See V. Acharya and R. Sundaram, “The Financial Sector Bailout: Sowing the Seeds of the Next Crisis?,” in 

Restoring Financial Stability: How to Repair a Failed System, ed. V. Acharya and M. Richardson (2009), 327– 

39. The authors wrote before the FDIC changed its pricing from 75 bps to the 50–100 bps scale depending 

on maturity; although this change would have altered their results somewhat, it would not have altered their 

conclusions. 

26 Levy and Zaghini, “The Pricing of Government-Guaranteed Bank Bonds.” The authors note that the total 

issuance was $184.9 billion, so even if all of the debt had incurred a fee of 100 bps, the total fee would have 

been less than $2 billion. 

27 74 Fed. Reg. 26523 (Jun. 3, 2009). The surcharges were also added to compensate DIF members, see note 24. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 47 

ability to issue debt.28 The Corporation used this discretion extensively to mitigate its risk 

of loss from the DGP. 

In using this discretion, the FDIC and the other federal banking agencies developed a 

consultative process to review the debt limits of otherwise eligible entities that had adverse 

regulatory ratings29 or poor financial metrics, such as very high past-due ratios or poor 

capitalization, and in the case of several hundred weak institutions, the Corporation 

reduced to zero the amount of guaranteed debt they could issue. From the very start of the 

program, no troubled entities (those with supervisory ratings of 4 or 5) had been allowed 

to issue guaranteed debt, and soon thereafter the restriction was expanded to include many 

3-rated entities as well as de novo banks (the latter have a significantly higher likelihood 

of failure than do established institutions). In all, the FDIC restricted the participation of 

more than 1,600 banks and thrifts and 1,400 BHCs, or approximately 35 percent of banks 

and thrifts and 39 percent of bank holding companies and other eligible affiliates that had 

opted into the program as of year-end 2008. 

Challenges: Payment of Claims and Legal Issues 

Of the several challenges the FDIC faced in creating the DGP, the most significant one 

was how to address the payment of claims under the program. Another was how to handle 

numerous technical details. 

Having never undertaken such a guarantee before, the Corporation was confronted with 

both a novel problem and a natural tendency to think in terms of its longstanding methods 

for handling insured deposits. As a result, the initial interim rule the FDIC put forward 

for the payment of claims relied for triggers on the receivership process for banks and 

on bankruptcy filings for BHCs—but neither of those adequately took into account the 

expectations of market participants for prompt payment.30 In addition, the issue of timely 

payment could have had serious implications for how the rating agencies treated TLGPguaranteed debt. 

Indeed, Euroweek described the program as having been “on the brink of collapse” in 

early November and noted that senior bankers were “highly dissatisfied with the scheme 

as it then stood and predicted disaster for it.”31 After the initial interim rule was published, 

28 73 Fed. Reg. 72267 (Nov. 26, 2008). 

29 The regulatory agencies rate both insured depository institutions and BHCs on a scale of 1 to 5, with 1 being 

the highest rating and 5 the lowest. 

30 Initially, the FDIC proposed two different methods for the payment of claims, one for insured depository 

institutions (IDIs), the other for BHCs. For IDIs, the FDIC expected to use its established receivership 

process, which the agency believed would in most cases lead to payment of claims the next business day 

after failure so long as the claim was determined to be valid. For BHCs, the FDIC stated it intended to pay 

principal plus interest to the debtholder when the BHC filed for bankruptcy, but only after the claim was 

allowed under the bankruptcy code. If the FDIC did not pay within one business day of the filing, the agency 

would pay interest on the debt at the 90-day Treasury bill rate in effect at the time of the filing. 73 Fed. Reg. 

64184-85 (Oct. 29, 2008). 

31 Euroweek, “FDIC Fiddling Rescues Bank Liquidity Plan,” November 28, 2008, 10. 
48 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

parties that commented on it—including representatives of Bank of America, Bank of 

New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and 

Wells Fargo—urged that FDIC regulations provide that payment be made as principal and 

interest became due and payable, and they noted that if the FDIC failed to make payment as 

soon as an issuer defaulted, the demand for DGP debt would be severely curtailed because 

likely purchasers would be very concerned about timely receipt of scheduled payments 

with minimal risk exposure.32 

Standard & Poor’s (S&P) stated that in order for FDIC-guaranteed debt “to qualify for 

rating substitution treatment [in other words, for FDIC-guaranteed debt to receive the same 

rating as debt of the U.S. government], the terms of a guarantee had to be unconditional, 

irrevocable, and timely.” S&P warned, however, that the initial interim rule made it 

“uncertain whether payment of interest and principal under [the FDIC’s] guarantee would 

have to be made on a timely basis” and that, indeed, “there appears to be the potential for a 

significant delay in payment beyond the terms specified in the debt, even though ultimate 

repayment is expected.” S&P indicated that under the interim rule, guaranteed debt would 

“result in, at most, limited rating elevation for guaranteed obligations” and that unless 

the proposal was amended, “we would be unable to rate the debt of financial institutions 

qualifying for the FDIC guarantees at the ‘AAA’ rating of the U.S. government.”33 Such an 

outcome would have greatly reduced the effectiveness of the DGP. 

The FDIC recognized the validity of the commenters’ concerns, and the final rule, in 

November 2008, incorporated changes that assured debtholders they would continue to 

receive timely payments following payment default without compromising the FDIC’s 

ability to obtain enough information to pay claims appropriately.34 

The trigger for the payment obligation was changed from a bank failure or a bankruptcy 

filing to a payment default.35 In addition, the FDIC’s satisfaction of the guarantee would be 

32 See, for example, the comment letter at https://www.fdic.gov/regulations/laws/federal/2008/08c39AD37. 

pdf. The FDIC sought to acquire knowledge about the debt markets, and during the week of October 27 staff 

met with representatives of both S&P and Fitch to discuss their methods of rating debt securities. 

33 Tanya Azarchs and Scott Sprinzen, “U.S. Guarantees of Bank Debt under Interim Rules Do Not Promise 

Timely Payment,” Standard & Poor’s Ratings Direct (November 10, 2008), 2. Quotations from this publication 

are reproduced with permission of Standard & Poor’s Financial Services LLC. Standard & Poor’s Financial 

Services LLC (S&P) does not guarantee the accuracy, completeness, timeliness or availability of any 

information, including ratings, and is not responsible for any errors or omissions (negligent or otherwise), 

regardless of the cause, or for the results obtained from the use of ratings. S&P gives no express or implied 

warrantees, including, but not limited to, any warranties of merchantability or fitness for a particular purpose 

or use. S&P shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, 

special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and 

opportunity costs) in connection with any use of ratings. S&P’s ratings are statements of opinions and are not 

statements of fact or recommendations to purchase, hold or sell securities. They do not address the market 

value of securities or the suitability of securities for investment purposes, and should not be relied on as 

investment advice. 

34 73 Fed. Reg. 72260 (Nov. 26, 2008). 

35 For the changes described here, see 73 Fed. Reg. 72263–4 (Nov. 26, 2008). 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 49 

such that the agency would continue to make scheduled interest and principal payments 

under the terms of the debt through its maturity.36 These changes addressed the concerns 

of both the industry and the rating agencies.37 With the program improvements in place, 

eligible entities quickly responded and, instead of claiming that the DGP was near 

collapse, Euroweek described it as having gotten off to “a scorching start,” with several 

large U.S. banks issuing $17 billion in guaranteed debt in late November after having 

been denied access to the market for months. The publication continued: “Clearly the 

once-reviled plan [had] ... been given a clean bill of health by the market.38 (The box 

titled “Institutions Using the Debt Guarantee Program” provides information about the 

use of the DGP by the largest financial institutions in the country—the group that issued 

the bulk of guaranteed debt. The appendix lists all the issuers of $250 million or more in 

debt guaranteed under the program.) 

Another important challenge was how to address numerous legal issues having to do 

with participation in the DGP. The final rule dealt with these difficulties by requiring 

an issuing entity to execute and file with the FDIC a “Master Agreement” that (1) 

acknowledged the establishment of a debt to the FDIC for any payment made under the 

program and agreed to honor the FDIC’s demand for payment on the debt immediately; 

(2) arranged for the DGP debtholder (a) to assign to the FDIC all rights and interests in 

that debt upon the FDIC’s payment under the guarantee and (b) to release the FDIC from 

any further liability with respect to that particular debt issuance; and (3) provided that 

the issuer could elect to designate an authorized representative to make claims on behalf 

of debtholders (claimants could choose, instead, to file with the FDIC individually, but 

the existence of an authorized representative for a class of debtholders was expected to 

permit a much faster response to a claim). 

* * * 

By mid-2009, financial markets were stabilizing, and DGP issuance was down 

significantly. In October, the FDIC approved a final rule ending the DGP on the last day of 

that month (on October 31, 2009), but with an emergency guarantee facility available on a 

36 For debt with final maturities beyond the DGP’s expiration, the FDIC could elect at any time after that date 

to pay all outstanding principal and interest under the debt issuance. 

37 For example, on November 24, Moody’s Investors Service announced that it would assign TLGP-guaranteed 

debt a rating of “Aaa,” the same rating it assigned the U.S. government, noting that the changes made to the 

program ensured timely payment (Moody’s Investors Service, “Moody’s Will Assign Backed-Aaa Ratings to 

Debt Securities Covered by the FDIC’s Guarantee,” Global Credit Research, November 24, 2008, https://www. 

moodys.com/research/Moodys-will-assign-backed-Aaa-ratings-to-debt-securities-covered--PR_167951). 

There remained some operational questions about how parties would proceed in the event of a default 

on DGP-guaranteed commercial paper. These questions were settled in April 2009 by a Memorandum of 

Understanding agreed to by the FDIC, the Depository Trust Clearing Corporation, the Federal Reserve Bank 

of New York, and the U.S. Treasury. 

38 Euroweek, “Goldman Leads TLGP Off to a Flying Start,” November 28, 2008, 9. 
 

50 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

case-by-case basis through April 30, 2010.39 The emergency facility carried very high fees 

(300 basis points). In announcing the availability of the emergency guarantee facility, Bair 

stated, “It should be clear that this is not a continuation of the program, but an ending of 

the program with just a short-term facility that is only available for clearly unforeseen and 

unexpected events.”40 The FDIC had always intended that the program be temporary; the 

emergency facility was never used and the DGP ended as scheduled on October 31, 2009. 

Institutions Using the Debt Guarantee Program 

Entities using the DGP ranged from small community banks to the largest financial 

institutions in the country, with the latter group issuing the bulk of guaranteed debt. 

The largest issuer was Citigroup, including Citibank and eligible affiliates, which 

issued almost $176 billion of guaranteed debt over the course of the program. Among 

banking organizations, the second-largest issuer was Bank of America Corporation, 

including its bank and eligible affiliates, which issued almost $131 billion; and 

the next-highest issuers among banking organizations were JPMorgan Chase & 

Company, its bank and affiliates; Goldman Sachs Group Inc.; and Morgan Stanley. 

Each of the three issued over $30 billion in guaranteed debt. 

Top Ten DGP Issuers by Dollar Amount ($ Billions) 

$175.90

$130.85 $130.84 

$42.51 $37.65 

$30.26 

$10.02 $7.40 $7.28 $5.90 

Citigroup, Inc. General Bank of JP Morgan Goldman Morgan Wells Fargo & GMAC LLC U.S. Bancorp American 

$175.90 

Electric America Chase Sachs Stanley Company Express 

Capital Corporation & Co. Group, Inc. Bank, FSB 

Corporation 

continued 

39 74 Fed. Reg. 54743 (Oct. 23, 2009).
 

40 Emily Flitter, “Way Out Gets Clearer as TLGP to End,” American Banker, October 21, 2009, 1.
 
 

51 

c 

CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 

The second largest issuer of DGP debt overall was General Electric Capital 

Corporation (GECC), which was a savings and loan holding company by 

virtue of its indirecta

 ownership of GE Money Bank, Salt Lake City, Utah. The 

FDIC’s TLGP rule allowed such holding companies to participate in the DGP, 

but only if they were engaged solely in activities permissible for a financial 

holding company under section 4(k) of the Bank Holding Company Act.b 

GECC was, however, not solely engaged in those permitted activities, and so 

instead it applied (as was also allowed) to participate based on its status as an 

affiliate of an insured depository institution that had received the requisite 

endorsement from the appropriate federal banking regulator (in this case, 

the Office of Thrift Supervision). After some discussion between GECC’s 

parent, General Electric (GE) and the government, the FDIC approved the 

firm’s participation. The FDIC judged GECC’s capital and risk management to 

be solid, and since GE agreed to guarantee the FDIC against loss, GECC’s fees 

would help bolster the FDIC’s reserves and offset potential losses in the DGP.c 

A number of U.S. bank subsidiaries of very large foreign banking organizations 

also issued guaranteed debt; these included Union Bank (the U.S. subsidiary of 

Mitsubishi UFJ Financial Group, Inc.); HSBC Bank USA, National Association (the 

U.S. subsidiary of HSBC Holdings, PLC); and Bank of the West (the U.S. subsidiary 

of BNP Paribas). 

a GECC’s two bank subsidiaries (GE Money Bank and GE Capital Financial, Inc.) were direct, wholly 

owned subsidiaries of GE Consumer Finance, Inc., which was wholly owned by GECC. 

b 12 U.S.C. §1843(k). 

On GECC, see Paulson, On the Brink, 373, 400; and Bair, Bull by the Horns, 118. 

The Transaction Account Guarantee Program: Purpose, Fees,

and Extensions 

Under the TAGP, the FDIC provided a guarantee of all funds held in non-interest-bearing 

transaction accounts at participating banks until December 31, 2009 (the guarantee was 

extended twice, first through June 30, 2010, and then through December 31, 2010, as 

discussed below).41 The program was intended to encourage customers to keep their 

41 The interim rule defined a qualifying account as “a transaction account with respect to which interest is 

neither accrued nor paid and on which the insured depository institution does not reserve the right to require 

advance notice of an intended withdrawal”(see 73 Fed. Reg., 64182 [Oct. 29, 2008]). But after receiving 

comments on the interim rule, the FDIC extended the TAGP to cover certain other types of deposit accounts 
52 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

deposits in their bank and thereby avoid runs at healthy banks. More particularly, the 

TAGP addressed the concern of bankers and others that, given the uncertain economic 

conditions, without the guarantee banks could lose many small-business accounts 

(including payroll accounts), which frequently exceed the insurance limit of $250,000.42 

The TAGP marked the first time the FDIC had offered deposit insurance above the 

statutory limit. In effect, the program gave institutions the option of purchasing deposit 

insurance for the otherwise uninsured balances of non-interest-bearing transaction 

accounts. In this way, assistance could be provided to smaller institutions that did not 

benefit from the DGP. This is not to say that larger institutions did not also participate in 

and benefit from the TAGP, for they did, but it is noteworthy that during the program’s 

extension through 2010, the proportional participation of banks with more than $10 

billion in assets dropped far more than did the proportional participation of smaller banks. 

Like the DGP, the TAGP imposed fees for using the program. The TAGP initially applied 

a 10 basis point annual assessment rate surcharge on non-interest-bearing transaction 

deposits and other qualifying accounts for amounts over $250,000; with the first extension, 

the fee was increased (see next paragraph). The total deposits covered by the TAGP are 

represented in Figure 2.4. 

The TAGP proved effective at preventing potentially disruptive shifts in deposit funding. 

As noted earlier in this section, the TAGP was intended to expire on December 31, 2009, 

but because bank failures continued to increase during 2009, the FDIC was concerned 

that terminating the TAGP too quickly could unnerve uninsured depositors and undo 

the progress made in restoring credit markets. Therefore, the FDIC Board extended the 

TAGP for an additional six months, through June 30, 2010.43 As part of this extension, the 

surcharge was increased from a flat rate of 10 basis points to a risk-based rate. Participating 

banks paid an assessment rate of 15, 20, or 25 basis points, depending on the institution’s 

deposit insurance assessment category (for deposit insurance assessment categories, see 

chapter 5). Institutions participating in the TAGP were allowed to opt out of the program 

effective on January 1, 2010. Over 6,400 institutions (or 93 percent of the institutions that 

were participating at year-end 2009) elected to continue in the TAGP through June 30, 2010. 

important to sole proprietorships and charitable organizations. These included Interest on Lawyers Trust 

Accounts (IOLTAs) and negotiable order of withdrawal (NOW) accounts where the participating institution 

committed to maintaining a rate no higher than 0.5 percent; this maximum was lowered to 0.25 percent as 

part of the second extension of the program. 

42 The Emergency Economic Stabilization Act of 2008 temporarily raised the basic FDIC insurance limit from 

$100,000 to $250,000 effective October 3, 2008; Dodd-Frank, in 2010, made the increase permanent. 

43 74 Fed. Reg. 45093 (Sept. 1, 2009). 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 53 

Figure 2.4. Amounts Guaranteed by the TAGP, 2008–2010 

Billions of Dollars 

0 

100 

200 

300 

400 

500 

600 

700 

800 

900 

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 

Even after that first extension, the lingering consequences of the financial crisis and 

recession continued to put pressure on banks’ earnings and asset quality. Those effects 

were expected to persist and could have had the potential to undermine banks, particularly 

banks exposed to local markets that had experienced the greatest distress. The FDIC 

was concerned that allowing the TAGP to expire in June as scheduled could lead to the 

withdrawals of large transaction accounts at many community banks, possibly resulting in 

needless liquidity failures of those banks or lower deposit franchise values (for a discussion 

of franchise value, see chapter 6). The FDIC therefore authorized a second six-month 

extension, until December 31, 2010, leaving in place the surcharges that had been imposed 

during the first extension. The Corporation left open the possibility of yet a third extension, 

but not beyond year-end 2011.44 However, passage of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank) in July 2010 eliminated the need for such an 

extension, as the law mandated that the FDIC provide an unlimited guarantee, funded by 

the DIF, of all non-interest-bearing transaction accounts from December 31, 2010, through 

December 31, 2012.45 Thus, the TAGP ended on December 31, 2010. 

44 See 75 Fed. Reg. 20247–65 (Apr. 19, 2010). 

45 For the implementation of the Dodd-Frank provisions regarding unlimited coverage of non-interest-bearing 

transaction accounts, see 75 Fed. Reg. 69577 (Nov. 15, 2010). The guarantee provided under Dodd-Frank 

did not, however, cover IOLTAs or NOW accounts. On December 29, 2010, a subsequent statute amended 
54 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The TLGP: Effects and Costs 

The DGP enabled financial institutions to meet their financing needs during a period 

of systemwide turmoil. At a time when banks and other eligible institutions were unable 

to roll over their debt at reasonable rates and terms, the DGP reopened the short- and 

medium-term debt markets by allowing participating institutions to issue an array of 

guaranteed debt instruments. Figures 2.5 and 2.6 show that the eligible entities, after 

issuing mostly short-term debt (commercial paper) at the very beginning of the program, 

increasingly moved toward issuing debt at longer maturities. 

Figure 2.5. DGP Debt Outstanding by Type, October 2008–December 2009 

Percent 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

Oct-08

Nov-08 

Dec-08 

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Other Term Notes Other Interbank Deposits Interbank Eurodollar Deposits 

Other Senior Unsecured Debt Medium-Term Notes Commercial Paper 

the definition of non-interest-bearing transaction accounts to include IOLTAs. The FDIC implemented the 

amended definition effective January 27, 2011. See 76 Fed. Reg. 4813 (Jan. 27, 2011). 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 55 

Figure 2.6. Maturities of TLGP Debt Outstanding at Month End, October 2008– 

October 2009 

Billions of Dollars 

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 

Greater than 3 Years 1–3 Years Less than 1 Year 

0 

50 

100 

150 

200 

250 

300 

350 

400 

Figure 2.7. Funding Costs: TLGP Debt vs. Non-Guaranteed Debt, January 2007– 

October 2009 

Basis Points 

600 

500 

400 

300 

200 

100 

0 

TLGP Debt to 

3-Year Treasuries 

Non-Guaranteed Debt to 

3-Year Treasuries 

158.1 

31.36 

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09 

Source: Bloomberg. 
 

56 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Specifically, the DGP lowered the cost of funding. For participating entities, the 

explicit FDIC guarantee—coming at a time when credit market spreads had reached 

record high levels—meant that DGP debt was assigned an AAA/Aaa rating. That rating 

allowed participating entities to raise funds and roll over maturing debt at significantly 

lower funding costs than the entities could have obtained by issuing debt not guaranteed 

by the government (see Figure 2.7). A 2017 study found that DGP-guaranteed bonds 

“vastly improved new and pre-existing debt liquidity” and that the program ultimately 

lowered the default risk of the institution (as well as of the insured bond) and, in addition, 

improved the liquidity for non-guaranteed bonds issued by DGP participants.46 A 2013 

study found that the DGP led to a drop in yield of AAA/Aaa financial debt near the time 

of the announcements of FDIC-guaranteed debt issuance and to a general pattern of 

decreasing yield spreads over time.47 

Figure 2.8. TLGP vs. Non-TLGP Debt Issuance, October 2008–October 2009 

Billions of Dollars 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

Non-TLGP $323.7 billion 

TLGP $618.3 billion 

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 

Sources: FDIC and Bloomberg. 

Note: TLGP debt includes medium-term notes, other senior unsecured debt, other term notes, commercial paper, 

Eurodollar interbank deposits, and other interbank deposits. Non-TLGP includes all types of bonds and structured notes 

except TLGP debt, commercial paper, and Eurodollar or other interbank deposits. 

46 See Jeffrey Black et al., “Benefits of Debt Guarantees: Evidence from the FDIC Debt-Guarantee Program” 

(unpublished manuscript), February 2017, https://editorialexpress.com/cgi-bin/conference/download. 

cgi?db_name=SWFA2017&paper_id=151. 

47 See Brent Ambrose et al., “The Financial Crisis and Temporary Liquidity Guarantee Program: Their Impact 

on Fixed Income Markets,” Journal of Fixed Income 23, no. 2 (2013): 5–26. 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 57 

In the wake of the DGP, debt markets stabilized. By September 2009, most banks 

were trading in the CDS market below where they were before the Lehman bankruptcy, 

and a senior syndicate banker remarked, “Good progress has been made so it makes 

sense for the TLGP to be withdrawn.”48 Indeed, only a few entities had issued DGP 

debt during the period of the DGP’s extension, a period when banks and their holding 

companies successfully issued non-guaranteed debt (see Figure 2.8). 

Another source of funding for banks, and in particular for community banks, is 

deposits held in transaction accounts. By removing the risk of loss to the businesses that 

commonly use these accounts to meet payroll and to serve other purposes, the TAGP 

stabilized deposit funding for insured banks.49 In the first quarter of 2009, banks reported 

586,519 non-interest-bearing transaction accounts over $250,000 in value, representing 

an increase of 12 percent compared with the fourth quarter of 2008. These first quarter 

2009 deposit accounts totaled $855 billion, of which $700 billion was guaranteed under 

the TAGP. At the peak of the program, in December 2009, more than 5,800 FDICinsured institutions reported having 685,465 non-interest-bearing transaction accounts 

over $250,000 in value, with deposits totaling just over $1 trillion. 

* * * 

If assessments for the TLGP (counting both components) had proved insufficient to 

cover the expenses related to the program, statute would have required that the FDIC 

levy a special assessment on all insured depository institutions (including those that 

had opted out, but not including BHCs or nonbank institutions that had participated) 

to cover the loss.50 However, overall, TLGP fees exceeded the costs of the program. 

Under the DGP, 121 entities issued guaranteed debt, with the FDIC collecting $10.4 

billion in fees and surcharges. Six entities defaulted on their debt, with the FDIC paying 

$153 million to cover the guarantee on those debt securities. 51 The majority of the FDIC’s 

48 Euroweek, “FDIC Plans Phase Out of Guarantee Programme,” September 11, 2009, 12. 

49 The TAGP also had an effect on FDIC resolutions during the crisis. In combination with the increased 

insurance coverage limit to $250,000, the TAGP greatly reduced the number of uninsured depositors at 

many failing banks. This reduction meant that there were many more whole bank–all deposit resolutions, 

as opposed to whole bank–insured deposit resolutions; the relative increase in whole bank–all deposit 

resolutions could have reduced the FDIC’s administrative costs. For a discussion of the different types of 

resolutions, see chapter 6. 

50 12 U.S.C. §1823(c)(4)(G)(ii). 

51 One of these losses involved fraud. Three employees of Coastal Community Investments (Coastal), a holding 

company that owned two Florida banks that would fail in 2010, were sentenced in 2014 to prison terms and 

were required to pay more than $4.5 million in restitution to the FDIC. Coastal had had a $3 million secured 

loan that was in default, and failure to repay the loan could have allowed its lender to take over the two 

Florida banks. In order to repay the loan and retain control of the banks, the employees misrepresented the 

loan as unsecured, allowing Coastal to borrow 125% of the $3 million amount and have it guaranteed under 

the DGP. Coastal then obtained a DGP-guaranteed $3.75 million loan from another bank. When Coastal 
58 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

payments ($113 million) stemmed from the outstanding DGP debt held by banks that 

failed in 2011. Under the TAGP, the FDIC collected $1.2 billion in fees; as of December 31, 

2016, estimated TAGP losses from failures were about $1.5 billion.52 The five failures with 

the highest resolution costs attributable to the TAGP, and the relationship between those 

costs and all other resolution costs attributable to the TAGP, are presented in Figure 2.9. 

Figure 2.9. The Costs of the TAGP: The 5 Most Expensive Failures vs. All Others 

($ Millions, as of December 31, 2016) 

$336.92 

$174.44 

$152.79 

$45.53 $91.59

$736.64 

Silverton 

Irwin Union Bank and Trust 

Colonial Bank 

Georgian Bank 

ShoreBank 

All Others 

Conclusion 

For the FDIC, the TLGP was extraordinary in several ways. First, during the Corporation’s 

first 75 years, it had never systematically protected bank debt, let alone bank holding 

company debt or the debt of nonbank holding company affiliates.53 Second, the FDIC 

later defaulted on this second loan, that lender filed a claim with the FDIC for the loan amount plus interest, 

and the FDIC paid the claim of just over $3.8 million. See U.S. Department of Justice, U.S. Attorney’s Office 

for the Northern District of Florida, “Bankers and Attorney Sentenced to Prison, for Fraud, False Statement, 

and Making a False Claim against the United States,” Press Release (August 22, 2014), https://www.justice. 

gov/usao-ndfl/pr/bankers-and-attorney-sentenced-prison-fraud-false-statements-and-making-false-claim. 

52 Because these totals were generated using estimated losses on failures as of December 31, 2016, they differ 

from totals reported by the FDIC at the end of the TAGP (December 31, 2010). 

53 During the 1980s, the FDIC, in the context of resolving troubled institutions, did protect debtholders several 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 59 

had never extended unlimited deposit insurance protection to a class of bank deposits 

(in this case, a broad subset of transaction accounts), although in the past the principle 

of unlimited deposit insurance coverage had been considered. Third, this was only the 

second time that the FDIC’s Board approved a systemic risk exception and the first time 

that the assistance was actually put in place (assistance to Wachovia had been approved 

two weeks earlier, but the need for it was subsequently obviated when Wells Fargo 

acquired that bank [see chapter 3]). Fourth, creation of the TLGP involved the use by 

bank regulators of a legal interpretation of the systemic risk exception that was at the 

least novel, as was acknowledged at the time. All these extraordinary features reflected 

the precarious state of the financial services industry in the fall of 2008. 

The TLGP, in concert with other government programs, brought stability to U.S. 

financial markets in a time of crisis. Conditions in the credit markets had improved 

significantly by the start of 2009, and by midyear they began returning to normal, 

despite still-elevated levels of problem loans; interest-rate spreads had retreated from the 

highs established during the depth of the crisis, during the fall of 2008; and activity in 

interbank lending and corporate bond markets had increased. Banks were able to issue 

debt without a government guarantee. This stabilization of the markets was accomplished 

with an industry-funded program that not only did not damage the DIF but, instead, 

substantially benefited it. Overall, during a period when the banking industry and 

the financial markets were in crisis, the TLGP made an important contribution to the 

stability of both. Looking back on the program, former chairman Sheila Bair noted that 

“if we ever again get into a situation where the entire financial system is seizing up, where 

even healthy and well-managed banks are having trouble accessing liquidity, I do think 

this is a good model to use.”54 

In several important ways, Dodd-Frank refined the range of actions that would be 

available for responding to future crises of the financial system, and did so essentially 

by limiting regulatory discretion should another crisis arise.55 In particular, the act 

repealed the use of a systemic risk exception to assist a troubled open individual 

times. In 1984, open-bank assistance to Continental Illinois National Bank and Trust Company included 

the protection of all general creditors; the open-bank assistance to First RepublicBank Corporation in 1988 

also protected all general creditors. Some bondholders were partially protected in the open-bank assistance 

to First City Bancorporation of Texas in 1988, and a year later, with the failure of MCorp, unsubordinated 

general creditors of 19 of the holding company’s banks were protected. See FDIC, Managing the Crisis: The 

FDIC and RTC Experience (1998), 554, 571, 595, 622. 

54 Joe Adler, “FDIC Debt Program Proves as Good as TARP, without the Baggage,” American Banker, 

April 26, 2012. 

55 See Martin Neil Baily and Aaron Klein, “The Impact of the Dodd-Frank Act on Financial Stability and 

Economic Growth,” Presentation at University of Michigan Center on Finance, Law, and Policy, October 24, 

2014, https://www.brookings.edu/on-the-record/the-impact-of-the-dodd-frank-act-on-financial-stabilityand-economic-growth/; and James Broughel, “Title XI: Fed Transparency and Bailouts,” in Dodd-Frank: 

What It Does and Why It’s Flawed, ed. Hester Peirce and James Broughel (2012), 121–35, https://www. 

mercatus.org/system/files/dodd-frank-FINAL.pdf. 
60 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

institution; and although Title XI does permit the creation of a program similar to 

the DGP, it also imposes restrictions on such a program.56 Dodd-Frank prohibits the 

creation of a future TAGP.57 

Title XI explicitly authorizes a “liquidity event determination.”58 The process of 

determining the existence of a liquidity event is similar to the process set forth in FDICIA 

for declaring a systemic risk exception: if the FDIC Board and the FRB determine that a 

liquidity event exists and that failure to act would significantly affect financial stability, 

and if the Secretary of the Treasury in consultation with the President concurs, the FDIC 

has the authority to create “a widely available program” to guarantee obligations of solvent 

insured banks or their holding companies (including holding company affiliates). 

But although the FDIC will be responsible for administering such a program, the 

maximum amount of outstanding debt that can be guaranteed is to be determined not 

by the FDIC but by the Secretary of the Treasury in consultation with the President. 

And, in a significant addition, the law also requires the program to have congressional 

approval in the form of a joint resolution—a requirement that essentially means 

Congress must pass the equivalent of a law before the program can go forward.59 So 

although Dodd-Frank provides for a program similar to the DGP, the law’s requirement 

for wider political consent through congressional approval (even though the approval 

would have to be considered on an expedited basis) could limit regulators’ flexibility 

during a future financial crisis. 

56 For the limits on the use of the systemic risk exception, see Dodd-Frank, §1106 [12 U.S.C 1823(c)(4)(G)(i)]; 

for the provisions allowing for a future DGP, see Dodd-Frank §1104–5 [12 U.S.C. 5611–12]. 

57 The law states that “a guarantee of deposits held by insured depository institutions shall not be treated as a 

debt guarantee program” under the provisions of the liquidity event determination (defined in note 58). See 

12 U.S.C. 5612(f). 

58 The law defines a liquidity event as “an exceptional and broad reduction in the general ability of financial 

market participants ... to sell financial assets without an unusual and significant discount or to borrow 

using financial assets as collateral without an unusual and significant increase in margin, or an unusual and 

significant reduction in the ability of financial market participants to obtain unsecured credit.” 

59 Like a bill, a joint resolution requires the approval of both the House and the Senate in identical form, 

and requires the President’s signature to become law (https://www.senate.gov/legislative/common/briefing/ 

leg_laws_acts.htm). 
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 61 

Appendix 

Table 2.A. Issuers of $250 Million or More in FDIC-Guaranteed Debt 

Breakdown by Affiliate 

Entity (if applicable) Amount Issuances 

1 Citigroup, Inc. TOTAL $175,903,888,595 1,655 

Citigroup, Inc. $13,850,000,000 5 

Citigroup Funding Inc. $128,997,377,222 1,165 

Citibank, National Association $33,056,511,373 485 

2 General Electric Capital TOTAL $130,850,166,935 4,328 

Corporation 

3 Bank of America TOTAL $130,842,662,031 1,454 

Corporation Bank of America Corporation $64,079,465,128 1,091 

Bank of America, National Association $46,976,837,903 281 

Merrill Lynch & Co., Inc. $19,786,359,000 82 

4 JPMorgan Chase TOTAL $42,512,382,326 189 

& Co. JPMorgan Chase & Co. $40,534,011,955 61 

JPMorgan Chase Bank, National $1,978,370,371 128 

Association 

5 Goldman Sachs Group, TOTAL $37,652,426,455 346 

Inc. 

6 Morgan Stanley TOTAL $30,256,932,941 57 

7 Wells Fargo & Company TOTAL $10,022,320,776 107 

Wells Fargo & Company $9,500,000,000 4 

Wells Fargo Bank, National Association $250,868,606 14 

Wachovia Bank, National Association $271,452,170 89 

8 GMAC LLC TOTAL $7,400,000,000 3 

9 U.S. Bancorp TOTAL $7,283,744,203 581 

U.S. Bank National Association $4,282,285,453 467 

U.S. Bancorp $3,001,458,750 114 

10 American Express TOTAL $5,900,000,000 3 

Bank, FSB. 

11 State Street Corporation TOTAL $5,289,431,500 53 

State Street Corporation $2,839,431,500 51 

State Street Bank and Trust Company $2,450,000,000 2 

12 John Deere Capital TOTAL $4,913,503,000 116 

Corporation 

13 HSBC USA Inc. TOTAL $4,742,598,079 24 

(subsidiary of HSBC HSBC USA Inc. $4,616,910,000 17 

Holdings, PLC) HSBC Bank USA, National Association $125,688,079 7 

14 Regions Bank TOTAL $4,200,000,000 6 

continued 
62 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Breakdown by Affiliate 

Entity (if applicable) Amount Issuances 

15 PNC Funding Corp. 

16 SunTrust Banks, Inc. 

17 Union Bank, National 

Association 

18 KeyCorp 

19	 Sovereign 

Bancorp, Inc. 

20	 The Bank of New York 

Mellon Corporation 

21 Bank of the West 

22 Banco Bilbao Vizcaya 

Argentaria Puerto Rico 

23 New York Community 

Bancorp, Inc. 

24 The Huntington 

National Bank 

25 Wilmington Trust 

Company 

26 MetLife, Inc. 

27 Associated Bank, 

National Association 

28 Fifth Third Bancorp 

29	 Zions Bancorporation 

TOTAL 

TOTAL 

SunTrust Bank 

SunTrust Banks, Inc. 

TOTAL 

TOTAL 

KeyBank National Association 

KeyCorp 

TOTAL 

Sovereign Bank 

Sovereign Bancorp, Inc. 

TOTAL 

The Bank of New York Mellon 

Corporation 

The Bank of New York Mellon 

TOTAL 

TOTAL 

TOTAL 

New York Community Bank
 

New York Community Bancorp, Inc.
 

TOTAL 

TOTAL 

TOTAL 

TOTAL 

TOTAL 

Fifth Third Bank 

Fifth Third Bancorp 

TOTAL 

$3,900,000,000 4 

$3,576,000,000 3 

$3,000,000,000 2 

$576,000,000 1 

$2,210,000,000 13 

$1,937,500,000 4 

$1,000,000,000 1 

$937,500,000 3 

$1,600,000,000 2 

$1,350,000,000 1 

$250,000,000 1 

$1,040,412,845 73 

$603,448,298 2 

$436,964,547 71 

$1,002,889,124 2 

$686,440,926 31 

$602,000,000 2 

$512,000,000 1 

$90,000,000 1 

$600,000,000 1 

$460,000,000 11 

$397,436,000 1 

$395,000,000 6 

$285,500,000 4 

$285,000,000 3 

$500,000 1 

$254,892,500 1 

Note: The data presented in this table account for 99.7 percent of the debt issued under the DGP. Data on 

the remaining issuers can be found at https://www.fdic.gov/regulations/resources/TLGP/total_debt.html.
CHAPTER 2: The Temporary Liquidity Guarantee Program: A Systemwide Systemic Risk Exception 63 

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False Claim against the United States.” Press Release. August 22, 2014. https://www.justice. 

gov/usao-ndfl/pr/bankers-and-attorney-sentenced-prison-fraud-false-statements-andmaking-false-claim. 

U.S. Department of the Treasury. Modernizing the Financial System: U.S. Treasury 

Department Recommendations for Safer, More Competitive Banks .1991. 

U.S. Government Accountability Office (GAO). Federal Deposit Insurance Act: Regulators’ 

Use of Systemic Risk Exception Raises Moral Hazard Concerns and Opportunities Exist to 

Clarify the Provision. GAO-10-100. 2010. http://www.gao.gov/products/GAO-10-100. 
66 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
3
 

Use of Systemic Risk Exceptions 

for Individual Institutions during 

the Financial Crisis 

Introduction 

As discussed in chapter 1, “Origins of the Crisis,” September 2008 was a critical month in the 

financial crisis. Lehman Brothers filed for bankruptcy, Washington Mutual Bank (WaMu) 

failed, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan 

Mortgage Corporation (Freddie Mac) were placed into government conservatorship, 

and the government provided assistance to American International Group (AIG). Two 

months earlier, in July, IndyMac, F.S.B., had failed. It was in this context that a systemic risk 

exception (SRE) allowing the FDIC to assist a large bank that might otherwise fail became 

an acute possibility. (For information on the increased size and complexity of the largest 

banks, see the box. For a timeline of major events during the financial crisis of 2008 and 

2009, see the timeline immediately following the Overview.) 

In deciding whether to invoke SREs for particular depository institutions (instead of 

allowing them to fail under the least-cost resolution framework1

), the FDIC, the Board 

of Governors of the Federal Reserve System (FRB), and the Department of the Treasury 

(Treasury) had to balance sometimes competing goals. These decisions raised questions 

about how to strike the balance between, on the one hand, stability and containing 

systemic risk, and, on the other, containing moral hazard and protecting the Deposit 

Insurance Fund (DIF), which can entail imposing losses on uninsured depositors, 

In the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), Congress required 

(among other things) that the FDIC resolve failed banks by using the method that would be least costly to 

the Deposit Insurance Fund (DIF), even if that meant imposing losses on uninsured depositors as well as 

creditors and shareholders. Congress allowed one exception to the least-cost resolution requirement. “If 

complying with those [least-cost] requirements would have serious adverse effects on economic conditions 

or financial stability and if FDIC assistance or other actions would avoid or mitigate those effects,” an SRE 

could be granted. FDICIA required that the decision to grant an SRE be made by the Secretary of the Treasury 

in consultation with the President, but only after a written recommendation by a two-thirds majority of both 

the Board of Directors of the FDIC and the Board of Governors of the Federal Reserve System (FRB). Once 

an SRE determination was made, the FDIC was authorized to act or assist as necessary to avoid the potential 

adverse effects of a major bank failure. 12 U.S.C. § 1823(c)(4)(G)(i) (2008). 

1 
68 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

creditors, and shareholders of failed banks. (Moral hazard arises when someone is willing 

to take greater risks in the belief that others will bear any negative consequences that may 

ensue.) As they considered invoking SREs in late 2008 and early 2009, the Treasury, the 

FDIC, the FRB, and other regulators debated a number of questions: whether to impose 

losses on bondholders, what supervisory strategies to use for firms that would receive 

assistance as a result of an SRE, and how the need for any additional SREs (if such a need 

arose) might affect public confidence in the regulatory system and the financial markets. 

This chapter examines the SREs that the Treasury, the FDIC, and the FRB decided on 

for three individual institutions (Wachovia on September 29, 2008, Citigroup on 

November 23, 2008, and Bank of America on January 16, 20092

), in each case discussing 

the problems at the institution, the rationale for recommending an SRE, the structure of 

government assistance granted under the SRE, and the effects of the SRE. 

Banking Industry Consolidation 

Before the banking crisis that began in 2008, the largest bank to become insolvent 

had been Continental Illinois National Bank and Trust Company. In May 1984, 

when regulators intervened, Continental Illinois was the nation’s seventh-largest 

bank. At the end of 1983, it had $40.7 billion in assets. 

By the end of 2007, the banking industry had consolidated considerably, and the 

largest banks had become much larger. In the fourth quarter of 1984, the four largest 

banks held 11.2 percent of total industry assets, whereas in the fourth quarter of 

2007, the four largest banks held 39.5 percent of total industry assets; the largest 

bank in the fourth quarter of 1984 had $142 billion in assets, while the largest bank 

in the fourth quarter of 2007 had $1.7 trillion in assets.a 

The largest banks had also become much more complex. The 1999 Gramm-LeachBliley Act allowed banks, securities companies, and insurance companies to affiliate 

with each other, thereby increasing the interconnections and interdependencies 

among financial companies. Several of the largest U.S. banks had also increased 

their global presence (and many large foreign banks had a significant presence in 

the United States). For example, the four largest banks in 2007 had, in aggregate, 

more than three times the level of assets held in foreign offices than they had in 

1998, and nearly one-third more foreign offices. 

aAssets of these banks include assets held by other banks under the same holding company. 

For Bank of America, an SRE was recommended on January 15, 2009, and an assistance package was 

announced on January 16, 2009. A formal systemic risk determination, however, was never made. 

2 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 69 

The Case of Wachovia 

The financial turmoil created by the failures of Lehman Brothers and WaMu and fears 

for the financial system served as the backdrop for the decision by the FDIC, FRB, and 

the Secretary of the Treasury to invoke an SRE to allow the acquisition of Wachovia—the 

first ever use of an SRE. (For a timeline of major events related to the Wachovia SRE, 

see Figure 3.1.) The decision to invoke an SRE for Wachovia set a precedent for the 

government’s response to the heightening financial crisis. 

Figure 3.1. Timeline of Wachovia Events 

July 22, 2008 (Tu) Wachovia announces an $8.9 billion loss for the 2nd 

quarter of 2008. 2008 

Sept. 25, 2008	 (Th) Washington Mutual Bank fails and JPMorgan Chase July acquires its deposits and assets. Two large counterparties 

refuse to lend to Wachovia overnight. 

Sept. 26, 2008	 (F) “Wachovia Weekend” begins. 

Sept. 29, 2008	 (M) Systemic risk exception (SRE) is recommended and September approved for Citigroup to acquire Wachovia. Citigroup/ 

Wachovia deal is announced. 

October 

Sept. 30, 2008	 (Tu) The IRS releases IRS Notice 2008-83, greatly easing 

the rules for writing off an acquired bank’s losses. 

Oct. 2, 2008	 (Th) Wells Fargo reenters the bidding for Wachovia 

and proposes a new offer that includes a higher share 

price than Citigroup’s offer and requires no government 

assistance. 

Oct. 3, 2008	 (F) Wells Fargo and Wachovia announce merger 

agreement. 

Oct. 4, 2008	 (Sa) Citigroup pursues legal action against both Wells 

Fargo and Wachovia. 

Oct. 12, 2008	 (Su) The FRB approves Wells Fargo’s acquisition of 

Wachovia Corporation. 

Source: Adapted from the Federal Reserve Bank of St. Louis’s Financial Crisis Timeline. 

Problems at Wachovia 

Wachovia Corporation (Wachovia), a financial holding company, owned multiple depository 

subsidiaries and provided a wide range of investment banking, private banking, and asset 

management services, in part through two broker-dealers. At the end of June 2008, Wachovia 

was the fourth-largest banking organization in the United States (after Bank of America 

Corporation, JPMorgan Chase & Co., and Citigroup, Inc.) with slightly over $800 billion 
70 

3 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

in holding company assets, of which over $780 billion were in the company’s depository 

institutions. (Table 3.1 lists the ten U.S. banking organizations with the largest amount of 

depository institution assets as of June 30, 2008.) 

Table 3.1. Top Ten Banking Organizations by Depository Institution Asset Size, 

June 30, 2008 

Depository Institution Totals 

Assets Deposits Domestic Deposits 

Name of Holding Company ($ Billion) ($ Billion) ($ Billion) 

Bank of America Corporation 1,670.21 882.90 701.49 

JPMorgan Chase & Co. 1,454.17 834.16 497.22 

Citigroup, Inc. 1,324.86 820.07 265.83 

Wachovia Corporation 782.30 475.17 422.00 

Wells Fargo & Company 558.45 361.27 293.41 

Washington Mutual, Inc. 307.02 188.26 188.26 

U.S. Bancorp 248.51 143.30 127.85 

The Bank of New York Mellon Corporation 185.99 131.15 55.03 

HSBC Holdings PLC 179.75 119.74 83.05 

SunTrust Banks, Inc. 173.35 122.21 115.60 

In early 2008, the FDIC downgraded its internal outlook rating (Large Insured 

Depository Institution, or LIDI, rating) for Wachovia Bank (a depository institution 

subsidiary of Wachovia),3 citing the bank’s “mark-to-market valuation adjustments” 

(see chapter 1), “considerable volume of inventory that could not be readily sold” in its 

The FDIC downgraded Wachovia’s LIDI rating to “C Negative.” A “C Negative” LIDI rating indicates that the 

FDIC considers an institution to have an elevated risk profile that is likely to deteriorate to a “3” CAMELS 

composite rating within 12 months. See Systemically Important Institutions and the Issue of “Too Big to Fail,” 

Before the Financial Crisis Inquiry Commission (Public Hearing on Too Big to Fail: Expectations and Impact 

of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis, September 

1, 2010) (statement of John H. Corston, Acting Deputy Director, Complex Financial Institution Branch, 

Division of Supervision and Consumer Protection, FDIC), 3, https://fcic-static.law.stanford.edu/cdn_ 

media/fcic-testimony/2010-0901-Corston.pdf. Bank supervisory ratings—CAMELS composite ratings— 

are on a scale of 1 to 5, with a 1-rating indicating greatest strength in performance and risk management 

and the lowest level of supervisory concern. At the other end of the scale, a 5-rating indicates the weakest 

performance, inadequate risk management, and the highest level of supervisory concern. The CAMELS 

composite rating is derived from an evaluation of the six CAMELS components: Capital adequacy, Asset 

quality, Management, Earnings, Liquidity, and Sensitivity to market risk. Although the CAMELS composite 

rating is generally a close reflection of the assigned component ratings, it is not an arithmetic average of the 

component ratings. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 71 

structured finance business, and “increasing required provisions for loan and lease losses.”4 

The inventory included subprime mortgages, syndicated credits within collateralized 

loan obligations, and a large volume of commercial real estate (CRE) loans that were 

acquired or originated for inclusion in commercial mortgage-backed securitizations. 

In August 2008, after monitoring the bank closely for several months, the Office of 

the Comptroller of the Currency (OCC, Wachovia Bank’s primary federal regulator) 

downgraded the institution’s CAMELS rating to a composite “3.”5

 On September 11, 

Wachovia requested an exemption from Federal Reserve rule 23A, which restricts most 

credit and sale transactions between an insured depository institution and its affiliates, to 

allow the holding company to meet its liquidity needs.6

 This request was initially denied 

because Federal Reserve officials believed that Wachovia had a strong cash position, but 

after the Lehman bankruptcy (on September 15) and an increase in depositor outflows 

at Wachovia Bank, the request was granted on September 19.7

 The exemption allowed 

Wachovia to use funding obtained by its insured depository institution affiliates to help 

support its liquidity needs. 

Together, Wachovia’s subsidiary banks were the nation’s largest holders of paymentoption adjustable rate mortgages (ARMs).8

 (For a brief description of these mortgages, 

see the box titled “Types of Mortgage Products” in chapter 1.)9

 On September 25, 2008, 

the nation’s second-largest holder of payment-option ARMs, Washington Mutual Bank 

(WaMu), failed, and the next day its holding company, Washington Mutual Inc., filed for 

Chapter 11 bankruptcy protection.10 WaMu’s failure was widely attributed to its holdings 

4 Systemically Important Institutions, statement of Corston, 7. 

5 Ibid. 

6 See 12 U.S.C. § 371(c)(1) (2008). 

7 Financial Crisis Inquiry Commission (FCIC), The Financial Crisis Inquiry Report (2011), 366, http://fcicstatic.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. 

8 Wachovia’s exposure to payment-option ARMs arose primarily from its acquisition of World Savings 

Bank FSB and World Savings Bank Texas FSB, which together held roughly $65 billion in payment-option 

ARMs concentrated in California and Florida (FDIC, “Memorandum to the FDIC Board of Directors 

Regarding Wachovia Corporation,” September 29, 2008, http://fcic-static.law.stanford.edu/cdn_media/fcicdocs/2008-09-29_Memo_to_the_FDIC_Board_of_Directors.pdf). 

9 In sum, payment-option ARMs allow borrowers to set their own payment terms on a monthly basis. The 

borrower can, for example, make a minimum payment lower than the amount needed to cover interest; 

pay only interest, deferring payment of principal; or make payments calculated to have the loan amortize 

in 15 or 30 years. In addition, payment-option ARMs have an interest rate and payment that change 

periodically over the life of the loan based on changes in a specific index (with a typically low initial teaser 

rate that increases after a short period). 

10 With approximately $307 billion in assets at failure, WaMu was the largest depository institution failure in 

the FDIC’s history. FDIC, “Failures and Assistance Transactions—Historical Statistics on Banking,” https:// 

www5.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30. Assets at failure are based on assets reported in the 

institution’s last report of income and condition (Call Report) before failure. 
72 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

of payment-option ARMs, and its failure added to existing concerns among Wachovia’s 

depositors and creditors, since Wachovia also held large amounts of these assets.11 

Wachovia’s financial condition was deteriorating rapidly, largely because of losses in 

its portfolio of payment-option ARMs, a troubled CRE loan portfolio, and its weakened 

liquidity position.12 On the evening of Thursday, September 25, two regular Wachovia 

counterparties refused to lend overnight to the firm.13 On Friday, September 26 (the day 

after WaMu failed), Wachovia’s stock price fell sharply, and spreads on credit default swaps 

on its debt widened markedly, suggesting that the market perceived a significant increase 

in the risk of Wachovia’s defaulting on its debt. During the day on Friday, the bank’s 

liquidity very quickly deteriorated. Depositors accelerated withdrawals at Wachovia 

Bank, and deposit outflows reached about $5.7 billion (1.4 percent of the bank’s domestic 

deposits as of June 30, 2008). In addition, $1.1 billion in Wachovia Corporation’s assetbacked commercial paper and repurchase agreements could not be rolled over, and other 

signs of a severe liquidity crisis became obvious.14 By the end of the day on September 

26, Wachovia informed the OCC that, in the absence of a rescue agreement, Wachovia 

would be unable to obtain the funds needed to pay creditor claims that would come due 

the morning of Monday, September 29. Wachovia also identified Citigroup and Wells 

Fargo as potential buyers.15 

In addition to specific concerns about Wachovia itself, the banking agencies and 

Treasury were concerned about the effects that a Wachovia failure could have on the 

financial markets and on investors’ confidence in the stock market. 

The Decision to Invoke a Systemic Risk Exception 

Discussions about a potential acquisition of Wachovia began in earnest on the morning 

of Saturday, September 27. As of that morning, Citigroup was proposing an acquisition 

that would require government assistance, and Wells Fargo was considering an acquisition 

without government assistance.16 An acquisition requiring FDIC assistance would require 

an SRE. (By statute, an SRE was required because FDIC assistance would benefit Wachovia 

Bank’s shareholders.) On Sunday morning, however, Wells Fargo rescinded its preliminary 

offer—which required no government assistance—in favor of a new offer that would 

require government assistance. Wells Fargo’s change of position meant that both of the 

options for a Wachovia acquisition would require an SRE.17 

11 FCIC, Report, 366. 

12 FDIC, “Memorandum Regarding Wachovia,” 3. 

13 Systemically Important Institutions, statement of Corston, 8. 

14 Ibid., 9. 

15 Systemically Important Institutions, statement of Corston, 9; and FDIC, “Memorandum Regarding 

Wachovia,” 8. 

16 FCIC, Report, 366. 

17 Ibid., 368. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 73 

The Wells Fargo bid required the FDIC to share potential losses on a pool of up to $127.3 

billion in assets, with Wells Fargo assuming the first $2 billion in losses and remaining losses 

shared 80 percent by the FDIC and 20 percent by Wells Fargo, with the FDIC’s losses capped 

at $20 billion. The FDIC estimated that Wells Fargo’s bid would cost the DIF between $5.6 and 

$7.2 billion. The Citigroup bid requested that the FDIC share losses on a pool of up to $312 

billion, with Citigroup absorbing the first $30 billion in losses. In addition to the $30 billion 

first-loss position, Citigroup would absorb $4 billion in losses per year for the first three 

years (for a total of $42 billion in losses), and the FDIC would absorb any additional losses. 

The FDIC estimated that even under the most severe scenario, Citigroup’s first-loss position 

would likely result in no cost to the DIF. Wachovia itself submitted a third proposal—which 

would also require federal assistance and an SRE—that was intended to help Wachovia’s 

insured depository institution subsidiaries remain open and avoid FDIC receivership.18 

Wachovia’s proposal required credit protection from the FDIC for a pool of $200 billion of 

loans, with Wachovia covering the first $25 billion in losses. The FDIC determined that the 

Citigroup bid represented the least costly alternative for resolving Wachovia.19 

Several considerations led the FRB and the FDIC to recommend an SRE, which had 

never before been used. Wachovia was large, complex, and deeply interconnected with 

other financial institutions and markets. It held multiple bank charters and operated 

significant businesses outside its insured banks, including several retail securities 

brokerages. Many large financial firms had substantial counterparty exposure 

to Wachovia, and Wachovia provided back-up liquidity support to many traded 

instruments.20 Wachovia was also a major participant in the full range of domestic and 

international clearing and settlement systems.21 

Under a standard “least cost” resolution, the FDIC would be responsible for resolving 

the banking subsidiary, but the holding company and other subsidiaries would be resolved 

under bankruptcy law. In that scenario, shareholders would likely be wiped out and creditors, 

including commercial paper holders, foreign depositors, subordinated debt holders, 

and possibly senior note holders, would suffer significant losses,22 in some cases leading 

directly to losses at other financial institutions. Losses on Wachovia commercial paper held 

by money market mutual funds, many of which had recently experienced runs and one 

of which had “broken the buck,” could have led “more money market funds to ‘break the 

18 A receivership is the legal procedure for winding down the affairs of an insolvent bank. 

19 FDIC, “Memorandum Regarding Wachovia,” 8. 

20 Systemically Important Institutions, statement of Corston, 9. 

21 U.S. Government Accountability Office (GAO), Federal Deposit Insurance Act: Regulators’ Use of Systemic 

Risk Exception Raises Moral Hazard Concerns and Opportunities Exist to Clarify the Provision, GAO-10-100 

(2010), 14, http://www.gao.gov/products/GAO-10-100. 

22 FDIC, “Memorandum Regarding Wachovia,”11. 
 

74 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

buck,’ accelerating runs on those and other money funds.”23 The sudden failure of Wachovia 

could “lead investors to reassess the risk in U.S. commercial banks more broadly.”24 Losses 

imposed on general creditors and foreign depositors would, the decisionmakers believed, 

likely be a major shock to many foreign households and businesses and thus indirectly 

“could imperil this significant source of funding for other U.S. financial institutions.” 

Further loss of confidence resulting from imposing losses on creditors “might well lead 

short-term funding markets to virtually cease.” The offers from Citigroup and Wells 

Fargo, however, both called for assistance that would not impose losses on Wachovia 

shareholders or creditors. 

In the view of the FRB, the FDIC, and the Treasury, the benefits of an SRE outweighed 

the possible disadvantages. Given the precarious state of the financial markets, the 

decisionmakers agreed that the losses and indirect effects from a least-cost resolution 

would have significant adverse effects on economic conditions and the financial markets, 

worsening the already unstable overall financial environment and disrupting a large 

proportion of U.S. households and businesses.25 The FRB, the FDIC, and the Treasury also 

believed that the supply of credit to households and businesses would shrink substantially 

and that confidence in the current and future states of the U.S. financial system and 

economy would deteriorate further. 

Finally, an SRE was a prerequisite to arranging a successful acquisition of Wachovia, since 

both of Wachovia’s potential acquirers, Citigroup and Wells Fargo, told federal regulators 

that they would need federal assistance to acquire Wachovia. 

One disadvantage was a possible weakening of overall market discipline if investors were 

bailed out. Although decisionmakers wanted to know more about the specific debtholders 

who would benefit from government assistance and how much effect any assistance might 

have, they lacked this information and could not get it during the short period before they 

had to decide whether to invoke an SRE. 

23 Ibid., 10. In the event of the insolvency of the issuer of a security, a money market fund must dispose of the 

issuer’s security as soon as practicable (17 CFR § 270.2a-7(f)). Prime money market mutual fund assets had 

declined roughly $350 billion over the two weeks before the Wachovia discussions (Investment Company 

Institute via Bloomberg). Further, on September 16, the day after Lehman Brothers filed for bankruptcy, the 

net asset value of the Reserve Primary Fund fell below $1, or “broke the buck,” because the fund was forced to 

sell its holdings of Lehman Brothers’ securities. Three days after the Reserve Primary Fund broke the buck, 

the Treasury announced the Temporary Guarantee Program for Money Market Funds, which was funded 

by the Exchange Stabilization Fund. For more information related to money market funds and their reliance 

on commercial paper during the crisis, see Marcin Kacperczyk and Philipp Schnabl, “When Safe Proved 

Risky: Commercial Paper during the Financial Crisis of 2007–2009,” Journal of Economic Perspectives 24, no. 

1 (Winter 2010), http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/commercial.pdf. 

24 This and the remaining two quotations in this paragraph are from FDIC, “Memorandum Regarding 

Wachovia.” 

25 FDIC, Transcript, FDIC Closed Board Meeting, September 29, 2008, http://fcic-static.law.stanford.edu/cdn_ 

media/fcic-docs/2008-09-29_FDIC_Board_of_Directors_Meeting_Closed_Session.pdf. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 75 

A second disadvantage was the disparate treatment of different size banks that would 

result. As the crisis had accelerated in 2008, the FDIC had closed nearly a dozen small 

banks, but regulators would now be keeping a much bigger bank open. Furthermore, the 

costs, if any, of an exception to the least-cost resolution requirement would eventually be 

borne by the entire banking industry, including small banks. 

Recognizing the risk that a least-cost resolution could amplify the systemic financial 

crisis that was then underway, the FDIC and other policymakers concluded it was 

necessary to invoke the SRE and provide assistance that would benefit debt holders and 

shareholders in addition to insured depositors. On September 29, the FDIC Board and 

the FRB recommended invoking the SRE for the first time since it was created under 

FDICIA. After consultation with the President, the Secretary of the Treasury concurred 

with this recommendation, and financial assistance under the SRE was approved. The 

FDIC Board, estimating that the Citigroup proposal would result in no loss to the DIF, 

chose the bid that represented the least costly of the available methods of avoiding the 

serious adverse systemic effects that would have resulted from Wachovia’s failure. 

Actions Taken under the Exception 

On Monday, September 29, 2008, the FDIC announced that Citigroup would acquire 

Wachovia’s banking operations in an open-bank transaction assisted by the FDIC. All 

depositors (insured and uninsured) at Wachovia’s subsidiary banks would be fully 

protected, but the FDIC did not expect to suffer any loss, although this expectation 

was obviously subject to substantial uncertainty. Citigroup would acquire the bulk of 

Wachovia’s assets and liabilities, including its depository institutions, and would assume 

the senior and subordinated debt of the holding company. Wachovia’s holding company 

would continue to own three investment banking subsidiaries. 

The FDIC would agree to share future losses on a pre-identified pool of $312 billion 

in loans: Citigroup would agree to absorb up to $42 billion of future losses on the pool 

(a $30 billion first-loss position, and an additional $4 billion in losses per year for 

the first three years) and, if losses exceeded this amount, the FDIC would absorb the 

additional losses. To compensate the FDIC for its risk of loss, Citigroup would give the 

FDIC $12 billion in preferred stock and warrants. Although the FDIC projected that the 

transaction would not result in losses to the FDIC, any losses that did occur would be 

paid by the FDIC but financed through a line of credit from the Treasury, to be repaid 

later by the banking industry. 

Severe time constraints combined with the difficulty of the negotiations prevented 

Wachovia and Citigroup from signing a final purchase agreement, but they did sign a short 

exclusivity agreement. The lack of a formal purchase agreement, in combination with other 

events, helped open the door for Wells Fargo to reenter the bidding for Wachovia. One of 
76 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

these other events was a ruling by the Treasury (IRS Notice 2008-83, repealed in 2009) on 

Tuesday, September 30, that limited the tax consequences of the aquisition.26 

Wells Fargo reentered the bidding on the evening of Thursday, October 2, with an offer 

to acquire all of Wachovia’s operations; the new bid did not require any FDIC assistance 

and offered shareholders a higher price than the Citigroup proposal. Wells Fargo offered to 

pay an estimated $7 per share, seven times Citigroup’s bid of $1 per share.27 Before the end 

of that day, Wachovia’s board had approved a merger with Wells Fargo.28 Early the next day, 

on Friday, October 3, the two banks publicly announced their merger. 

The Wells Fargo offer reduced direct risk to the FDIC and probably also helped to 

reduce market uncertainty that could have been created by the Citigroup agreement, which 

would have left key “nonbank” parts of Wachovia (the investment banking subsidiaries) in 

a separate organization (under the Wachovia holding company). The Wells Fargo offer was 

also a better deal for Wachovia’s stockholders.29 

On October 12 the FRB announced its approval of the acquisition of the whole of 

Wachovia by Wells Fargo. On January 1, 2009, Wells Fargo announced that the merger had 

become effective the previous day, December 31, 2008. 

Effects of Invoking the Exception 

The successful acquisition of Wachovia negated any need for FDIC assistance, and no 

assistance was provided under the SRE. As a result of the Wells Fargo acquisition, Wachovia 

was able both to fund itself and to continue normal operations, and the projected adverse 

effects of a least-cost resolution of Wachovia were averted. Nevertheless, invoking the SRE 

set an important precedent by signaling to financial markets that the government was 

willing to take action to avert systemic problems in the banking industry. 

26 “The Treasury’s inspector general, who later conducted an investigation into the circumstances of the notice’s 

issuance, reported that the purpose of the notice was to encourage strong banks to acquire weak banks by 

removing limitations on the use of tax losses.” Rich Delmar (Treasury Office of the Inspector General), 

interview by FCIC, August 25, 2010, https://fcic.law.stanford.edu/interviews/view/51; and Rich Delmar, 

“Memorandum for Inspector General Eric M. Thorson, Inquiry Regarding IRS Notice 2008-83,” September 

3, 2009, 3, 5, 11–12, https://www.treasury.gov/about/organizational-structure/ig/Documents/Inquiry%20 

Regarding%20IRS%20Notice%202008-83.pdf. Further, the inquiry found “no basis to charge that the timing 

of the Notice’s development, review, and promulgation was driven by a request or plan to affect or assist any 

particular corporate transaction,” 8. 

27 FCIC, Report, 370. 

28 Ibid. 

29 Citigroup initiated legal action against both Wells Fargo and Wachovia on October 4, the day after the 

announcement. The legal action sought, in part, a restraining order against the merger and punitive 

damages. See The Acquisition of Wachovia Corporation by Wells Fargo & Company, Before the Financial 

Crisis Inquiry Commission (Public Hearing on Too Big to Fail: Expectations and Impact of Extraordinary 

Government Intervention and the Role of Systemic Risk in the Financial Crisis, September 1, 2010) 

(statement of Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System), 

8, https://www.federalreserve.gov/newsevents/testimony/alvarez20100901a.pdf. On October 9, Citigroup 

agreed to let the Wachovia/Wells Fargo merger proceed without hindrance and announced that its 

continuing claims would be limited to seeking compensatory damages. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 77 

The Case of Citigroup 

The decision to invoke an SRE for Citigroup, whose insured banks were substantially larger 

than Wachovia’s banks, was, in the end, unavoidable. Citigroup’s failure would have had 

serious systemic consequences. (For a timeline of major events related to the Citigroup 

SRE, see Figure 3.2.) 

Figure 3.2. Timeline of Citigroup Events 

2008 

October 

November 

2009 

January 

February 

March 

December 

Oct. 9, 2008
 

Oct. 14, 2008
 

Oct. 16, 2008
 

Nov. 17, 2008
 

Nov. 19, 2008
 

Nov. 20, 2008
 

Nov. 21, 2008
 

Nov. 23, 2008
 

Jan. 16, 2009
 

Feb. 27, 2009
 

Mar. 5, 2009
 

Dec. 14, 2009
 

(Th) Citigroup announces it will stop pursuing the 

previously announced acquisition of Wachovia. 

(M) Citigroup receives $25 billion capital investment 

from Treasury via the Capital Purchase Program (CPP) 

under the Troubled Asset Relief Program (TARP). 

(Th) Citigroup announces a $2.8 billion net loss for 3rd 

quarter of 2008. 

(M) Citigroup announces it will lay off 52,000 employees. 

(W) Citigroup announces it will move all its remaining 

Structured Investment Vehicles, which had lost $1.1 

billion in net value since September 30, onto its 

balance sheet. 

(Th) Government officials begin negotiations on a 

Citigroup assistance package. 

(F) Citigroup’s liquidity deteriorates. 

(Su) SRE is recommended and approved to provide 

assistance to Citigroup using an asset guarantee for a 

selected pool of assets ($306 billion) and an additional 

$20 billion capital investment via TARP. Deal is 

announced at 11:00 p.m. 

(F) FDIC, FRB, and Treasury finalize terms of the asset 

guarantee agreement with Citigroup. 

(F) Treasury announces agreement to convert its 

preferred Citigroup stock to common stock. 

(Th) Citigroup’s stock hits an all-time low of $1.02. 

(M) Citigroup announces it will repay all assistance 

provided under TARP ($45 billion) and terminate its asset 

guarantee agreement with the FDIC, FRB, and Treasury. 

Source: Adapted from the Federal Reserve Bank of St. Louis’s Financial Crisis Timeline. 
 

78 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Problems at Citigroup 

Citigroup, Inc. (Citigroup) was one of the largest financial institutions in the world. As of 

September 30, 2008, Citigroup had total consolidated assets of just over $2 trillion, with 

approximately $1.2 trillion in assets in its lead bank subsidiary, Citibank, N.A. (Citibank). 

Citigroup owned a total of five insured legal entities and three principal nonbank 

subsidiaries, and, with operations in over 100 countries, had an extensive international 

presence.30 The company had “significant amounts of commercial paper and long-term 

senior and subordinated debt outstanding and was a major participant in numerous 

domestic and international payment, clearing, and central counterparty arrangements,” as 

well as a major player in derivatives markets.31 Citigroup’s vulnerability lay in its exposure 

to credit and market losses coupled with its dependence on international operations for 

funding (including $554 billion in foreign deposits).32 

In February 2008, in light of the substantial losses Citigroup realized in the third 

and fourth quarters of 2007, the OCC (Citibank’s primary federal regulator) conducted 

examinations to review risk management and governance at Citibank. The OCC 

found that management had incurred “what proved to be untenable risks for the sake 

of profitability.”33 The supervisory letter sent to Citibank included specific “Matters 

Requiring Attention” pertaining to deficiencies in the company’s risk management, 

governance, and control processes.34 In April 2008, the Federal Reserve Bank of New York 

(FRBNY) downgraded its RFI/C rating of the parent bank holding company, Citigroup, 

from a 2 to a 3, reflecting its assessment that the firm’s weaknesses in risk management 

and financial condition ranged from fair to moderately severe.35 

30 FDIC, “Memorandum to the FDIC Board of Directors Regarding Citigroup,” November 23, 2008, 5, http:// 

fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-11-23%20FDIC%20Board%20of%20Directors%20 

Memo%20re%20Citi.pdf. 

31 Special Inspector General for the Troubled Asset Relief Program (SIGTARP), “Extraordinary Financial 

Assistance Provided to Citigroup, Inc.,” Management Comments from FDIC, SIGTARP-11-002, January 

13, 2011, 2, https://www.sigtarp.gov/Audit%20Reports/Extraordinary%20Financial%20Assistance%20 

Provided%20to%20Citigroup,%20Inc.pdf. Derivatives are financial contracts whose prices are derived from 

performance of an underlying asset, rate, index, or event. 

32 FDIC, “Memorandum Regarding Citigroup.” 

33 Office of the Comptroller of the Currency, Supervisory Letter 2008-05 to Vikram Pandit, Chief Executive 

Officer of Citigroup, Inc., February 14, 2008, http://fcic-static.law.stanford.edu/cdn_media/fcicdocs/2008-02-14_OCC_Letter_from_John_C_Lyons_to_Vikram_Pandit_Serious_Problems_at_Citibank. 

pdf. 

34 Ibid. Matters Requiring Attention (MRAs) are supervisory tools used by the OCC to formally communicate 

supervisory concerns. MRAs “must receive timely and effective corrective action by bank management 

and follow-up by examiners.” For updated guidance on the MRA process, see OCC Bulletin 2014-52, 

“Matters Requiring Attention: Updated Guidance,” October 30, 2014, http://www.occ.gov/news-issuances/ 

bulletins/2014/bulletin-2014-52.html. 

35 Federal Reserve Bank of New York, “Report of Inspection to Board of Directors, Citigroup, Inc.,” April 15, 

2008, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-04-15_FRBNY_Letter_from_John_J_ 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 79 

The events of September 2008 roiled financial markets and the entire banking sector, 

including Citigroup. The Chicago Board Options Exchange’s Market Volatility Index, 

or VIX, reached a historic high on September 29, indicating a sharp rise in market 

uncertainty.36 Similarly, another common measure of market instability, the “TED 

Spread” (which measures credit risk as the spread between three-month LIBOR and 

three-month Treasury bill rates) reached 315 basis points on September 30, the highest 

level ever reached until then. (Eleven days later, on October 10, it reached its all-time 

high of 458 basis points.)37 

In October 2008, in the midst of this turmoil, Citigroup’s troubles intensified. On 

October 9 the company announced it would stop pursuing the previously announced 

acquisition of Wachovia.38 Five days later, on October 14, the Treasury announced the 

establishment of the Capital Purchase Program (CPP) through the Troubled Asset Relief 

Program (TARP).39 Treasury stated in the announcement that Citigroup would receive 

a $25 billion capital investment from the Treasury under the new program. (Eight other 

large institutions would also receive capital investments.) On October 16, Citigroup 

reported a net loss of $2.8 billion for the third quarter of 2008.40 The loss was largely 

attributed to subprime and Alt-A mortgages (see box titled “Types of Mortgage Products” 

in chapter 1),41 commercial real estate (CRE) investments, and write-downs of Structured 

Investment Vehicle (SIV) assets42 (see the section titled “Mortgage Securitization” in 

Ruocco_to_Board_of_Directors_of_Citigroup_Re_Annual_report_of_inspection.pdf. The Federal Reserve 

System assigns supervisory ratings, called “RFI/C ratings,” to the bank holding companies it supervises. The 

ratings acronym stands for Risk management, Financial condition, potential negative Impact of the parent 

company and nondepository subsidiaries on bank and thrift subsidiaries, and Composite, or the overall 

rating. Ratings range from 1 (the best) to 5 (the worst). See Federal Reserve Bank of St. Louis, “Federal 

Reserve Introduces New BHC Rating System,” Central Banker (Spring 2005), https://www.stlouisfed.org/ 

Publications/Central-Banker/Spring-2005/Federal-Reserve-Introduces-New-BHC-Rating-System. 

36 The Chicago Board Options Exchange defines the VIX Index as “a key measure of market expectations of 

near-term volatility conveyed by S&P 500 stock index option prices.” VIX is a commonly referenced measure 

of market volatility and reached its all-time high of 80.86 on November 20, 2008. 

37 LIBOR stands for the London interbank offered rate; this rate is set daily and is the interest rate at which 

banks offer to lend funds to one another in the international interbank market. 

38 Citigroup, Inc., “Citi Ends Negotiation with Wells Fargo on Wachovia Transaction,” Press Release, October 

9, 2008, http://www.citigroup.com/citi/news/2008/081009g.htm. 

39 U.S. Department of the Treasury, “Treasury Announces TARP Capital Purchase Program Description,” Press 

Release, October 14, 2008, https://www.treasury.gov/press-center/press-releases/Pages/hp1207.aspx. 

40 Citigroup, Inc., Third Quarter 2008 Earnings Review Presentation, October 16, 2008, http://www.citigroup. 

com/citi/investor/data/p081016a.pdf?ieNocache=975. 

41 Alt-A mortgages are made to borrowers with credit ranging from very good to marginal, but they are made 

under expanded underwriting guidelines that make these loans higher risk and also higher interest. 

42 SIVs were highly leveraged entities held by banking companies but which, as separate legal entities, were 

off the banks’ balance sheets and were therefore not subject to regulatory capital requirements, even if a 

SIV’s parent holding company was under federal supervision. SIVs were designed to generate cash flows by 
80 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

chapter 1). Despite Citigroup’s receipt of substantial government support through broadbased Treasury, Federal Reserve, and FDIC programs available to financial institutions 

in September and October,43 the company’s stock price continued to decline through 

mid-November, hitting single digits for the first time since 1996. On November 17, 

the company announced it would lay off 52,000 employees (in addition to a previously 

announced layoff of 23,000 employees).44 Two days later, Citigroup announced that 

it would move all its remaining SIVs, which had lost $1.1 billion in net value from 

September 30 to November 19, onto its balance sheet, reducing the value of Citigroup’s 

assets.45 By the next day, Citigroup’s stock had fallen 73 percent just since the beginning 

of the month. In addition, the VIX index reached a new all-time high, signaling that 

financial markets were extremely uncertain. 

Major lenders were questioning management about the firm’s viability, and some even 

began to cap or reduce lines of credit and ask for additional collateral from Citibank. 

Regulators saw increasing signs pointing to a run on Citibank, as corporations were 

beginning to withdraw significant sums, especially in the United States and Europe. 

Citigroup’s liquidity portfolio had decreased from $33.1 billion on Thursday, November 20, 

to $31.4 billion on Friday, November 21.46 Citigroup requested expanded lines of credit at 

existing government liquidity facilities, but regulators did not think any additional liquidity 

they could provide would be sufficient to enable Citibank to withstand extensive deposit 

runoff. They also did not think the company had enough high-quality collateral to be able 

to borrow more under the Federal Reserve’s mostly collateral-based liquidity programs.47 

issuing short- to medium-term debt—including asset-backed commercial paper—at a low interest rate to 

raise funds that the institution could invest in longer-term assets, such as mortgage-backed securities. 

43 Citigroup had received $25 billion in capital under TARP and was relying on a number of other liquidity 

programs: as of November 21, Citigroup had $24.3 billion outstanding under the Federal Reserve’s 

collateralized liquidity programs and $200 million under its Commercial Paper Funding Facility. Citigroup 

had also borrowed $84 billion from the Federal Home Loan Banks (FHLBs), which are governmentsponsored enterprises that lend to banks and thrifts on a secured basis. When the securitization market 

froze, FHLBs increased their lending substantially, becoming “the lender of next to last resort for commercial 

banks and thrifts—the Fed being the last resort.” See FCIC, Report, 274, 381. Citigroup and its subsidiaries 

also issued $38 billion in senior debt that was guaranteed by the FDIC under the Temporary Liquidity 

Guarantee Program. See FDIC, “TLGP Debt Guarantee Program: Issuer Reported Debt Details,” https:// 

www.fdic.gov/regulations/resources/tlgp/total_debt.html. 

44 Eric Dash, “Citigroup Plans to Sell Assets and Cut More Jobs,” New York Times, November 17, 2008. 

45 Citigroup, Inc., “Citi Finalizes SIV Wind-Down by Agreeing to Purchase All Remaining Assets,” Press 

Release, November 19, 2008, http://www.citigroup.com/citi/news/2008/081119a.htm. 

46 Mark D. Richardson, e-mail message to Doreen R. Eberley, Daniel E. Frye, et al., subject: “11-21­

08 Citi Liquidity call notes,” November 21, 2008, http://fcic-static.law.stanford.edu/cdn_media/fcicdocs/2008-11-21%20FDIC%20Richardson%20Email%20re%2011-21-08%20Citi%20Liquidity%20Call%20 

Notes.pdf. 

47 FDIC, “Memorandum Regarding Citigroup,” 6. 
 

CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 81 

On Friday, November 21, the spreads on credit default swaps written on the company 

more than doubled. Management at Citibank told regulators that a 7.2 percent deposit 

runoff would exhaust its cash surplus, and they had prepared stress scenario estimates that 

showed deposit runoff of approximately 2 percent of total deposits per day.48 Regulators 

projected that if deposit outflows continued, Citibank would be unable to pay its obligations 

or meet expected deposit outflows by the middle or the latter part of the following week 

(the week beginning November 24). 

The Decision to Invoke the Systemic Risk Exception 

By Thursday, November 20, the banking agencies and the Treasury had begun discussing 

additional assistance in light of both Citigroup’s deteriorating condition and the market’s 

negative response to Citigroup’s SIV announcement the previous day. Staff from the 

agencies shared the information they had and worked closely to review available options, 

but the agencies—and even the bank itself—had trouble producing detailed counterparty 

information on such short notice.49 

During the discussions, the Treasury and the banking agencies agreed that the potential 

failure of Citigroup presented a serious systemic risk, particularly in the wake of the failures 

of Lehman Brothers and WaMu, the acquisition of Merrill Lynch by Bank of America 

(discussed below), and Wells Fargo’s acquisition of Wachovia. There was no viable acquirer 

for an institution with the size, complexity, and global operations of Citigroup. The other 

largest banks, Bank of America, JPMorgan Chase, and Wells Fargo, were not considered as 

potential acquirers because of their previous acquisitions of (and absorption of losses from) 

Merrill Lynch, Bear Stearns (in March 2008), and Wachovia, respectively. Further, given 

Citigroup’s size, a merger with any of these three banks would result in an even larger, more 

systemically important bank. The FDIC Board of Directors held an emergency meeting on 

Sunday, November 23, to discuss and vote on an SRE recommendation. 

As they considered whether to recommend an SRE for Citigroup, members of the FDIC 

Board weighed several issues, including asset quality, liquidity problems, and management 

weaknesses at Citigroup, the lack of potential buyers, and the potential effects on the 

financial system if Citibank were allowed to fail. Board members discussed whether any 

changes in Citigroup’s supervisory ratings or its management should be required under 

a government assistance agreement and noted the potential need for future assistance 

for Citigroup or other systemically risky banks. In the end, the FDIC Board of Directors 

determined that any action taken by the FDIC under a least-cost resolution framework 

(that is, allowing Citigroup’s insured institution subsidiaries to fail and imposing losses 

on general creditors) would have significant adverse effects on economic conditions and 

the financial markets because of Citigroup’s size and its interconnectedness with other 

48 Ibid. 

49 SIGTARP, “Assistance to Citigroup,” 14. 
82 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

financial institutions. FDIC Board members noted that the case was “amply made that 

the systemic risk determination standard ha[d] been met” and that the potential failure of 

Citigroup was “obviously a systemic risk situation.”50 

On November 23, the FDIC Board and the FRB recommended that the Secretary 

of the Treasury invoke the SRE to allow the FDIC to provide the planned open-bank 

assistance for Citigroup. The Secretary of the Treasury, having consulted earlier with the 

President, concurred. 

Actions Taken under the Exception 

On Sunday, November 23, 2008, at 11 p.m., the Treasury, the FDIC, and the FRB 

announced an interagency assistance package for Citigroup.51 The package included a 

capital injection by the Treasury and loss protection on a pool of Citigroup’s assets by the 

Treasury, the FDIC, and the Federal Reserve Bank of New York (FRBNY). 

To inject needed capital, the Treasury invested an additional $20 billion in Citigroup 

in exchange for preferred stock under a new TARP program called the Targeted 

Investment Program (TIP). 

An asset guarantee was provided to Citigroup by the Treasury (under another new 

TARP program called the Asset Guarantee Program [AGP]) and the FDIC (using the 

authority granted by the SRE).52 The guarantee provided Citigroup with protection 

against the possibility of unusually large losses on a pool of approximately $306 billion 

of loans and securities backed by residential and CRE loans and other assets. Under the 

initial terms of the guarantee, Citigroup was to be solely responsible for the first $37 

billion in losses, which the government projected to be the expected loss for the assets 

under guarantee (See Table 3.2.)53 Any additional losses beyond Citigroup’s $37 billion 

first-loss position, up to another $16.66 billion, would be shared between Citigroup 

and the government, with Citigroup responsible for 10 percent of the losses and the 

government covering 90 percent (thus increasing Citigroup’s responsibility for potential 

losses by an additional $1.66 billion). The Treasury would be responsible for the first $5 

billion in the government’s share of losses, and the FDIC for the next $10 billion in the 

government’s share of losses. Ninety percent of any further losses beyond $53.66 billion 

($37 billion plus $16.66 billion) would be financed through a nonrecourse loan from the 

FRBNY, with Citigroup covering the remaining 10 percent. 

50 FDIC, Transcript, FDIC Closed Board Meeting, November 23, 2008, http://fcic-static.law.stanford.edu/ 

cdn_media/fcic-docs/2008-11-23%20Transcript%20of%20FDIC%20Board%20of%20Directors%20 

meeting,%20closed%20session.pdf. 

51 U.S. Department of the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation, “Joint 

Statement by Treasury, Federal Reserve, and the FDIC on Citigroup,” Press Release, November 23, 2008, 

http://www.federalreserve.gov/newsevents/press/bcreg/20081123a.htm. 

52 TARP had more than one component, including the Capital Purchase Program (CPP) discussed above in the 

section titled “Problems at Citigroup.” 

53 SIGTARP, “Assistance to Citigroup,” 19. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 83 

Table 3.2. Citigroup Asset Guarantee Loss Positions 

First Loss Position Second Loss Position Additional Losses 

Citigroup $37 billion 10%, up to 

$0.55 billion 

10%, up to 

$1.11 billion 10% 

Treasury 90%, 

up to $5 billion 

FDIC 90%, 

up to $10 billion 

FRBNY 90% 

(nonrecourse loan) 

Subtotal $37 billion $5.55 billion $11.11 billion 

Total $53.66 billion 

As compensation for these guarantees, Citigroup issued approximately $7.0 billion 

more in perpetual preferred stock paying an 8 percent annual dividend. Based on 

the relative loss positions and sizes of the guarantees of the two government entities, 

approximately $4 billion in stock went to the Treasury and approximately $3 billion to the 

FDIC.54 In addition to the preferred stock, the Treasury received common stock warrants 

that represented an aggregate exercise value of 10 percent of the total preferred stock 

issued to the U.S. government in both the loss share and asset guarantee components of 

the assistance package (that is, 10 percent of the approximately $27 billion in preferred 

stock issued, or $2.7 billion).55 If payments on the government guarantees exceeded 

the government’s compensation, the FDIC would be statutorily mandated to impose a 

special assessment on the entire banking industry to recoup the cost.56 

In addition to the direct capital support given to Citigroup, the agreement explicitly 

stated that the assets in the guaranteed pool would be risk-weighted at 20 percent for 

the purpose of calculating regulatory capital requirements. This treatment effectively 

lowered Citigroup’s capital requirement by $16 billion. In addition, issuing preferred 

shares to the government in compensation for the guarantee meant that Citigroup’s 

capital would increase by $3.5 billion.57 

54 U.S. Department of the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation, 

“Summary of Terms: Eligible Asset Guarantee (Citigroup),” November 23, 2008, https://www.fdic.gov/news/ 

news/press/2008/pr08125a.pdf. 

55 The warrants gave the Treasury the right to purchase 66,531,728 shares of common stock with a strike price 

of $10.61 (the 20-day trailing average price of Citigroup common stock ending on November 21, 2008) and 

a ten-year maturity. The Treasury had the right to exercise the warrants immediately in whole or in part. 

56 12 U.S.C. § 1823(c)(4)(G)(ii) (2008). 

57 FCIC, Report, 626, n.172. 
84 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The assistance agreement prohibited Citigroup from paying dividends on common stock 

in excess of a penny per share per quarter for three years without government consent. 

In addition, the agreement required Citigroup to submit to an executive compensation 

plan (including bonuses) that rewarded long-term performance and profitability.58 Finally, 

Citigroup agreed to implement loan modification procedures for the residential mortgages 

in the asset pool.59 

Although the assistance agreement was announced on November 23, implementation 

took several weeks. As provided in the agreement, Citigroup did not actually receive 

the Treasury’s $20 billion investment until December 31, 2008. Even then, the parties 

still needed to negotiate and finalize a master agreement and agree on the exact assets 

to be included in the guaranteed pool. By the time the finalized master agreement was 

announced on January 16, 2009, the value of the guaranteed pool had been reduced 

to $300.8 billion through asset exclusions and substitutions, and Citigroup’s first-loss 

position was increased to $39.5 billion, reflecting, among other things, additional 

reserves associated with the assets substituted into the pool. Ten more months passed 

before the asset pool was made final (on November 17, 2009).60 

Effects of Invoking the Exception 

In the short run, the announcement on November 23, 2008, that the SRE would be 

invoked and government assistance would follow had the intended effect of stabilizing 

Citigroup and preventing its failure. Citigroup was able to continue operating, and the 

announcement encouraged the private sector to continue providing liquidity to the 

company.61 Regulators continued to monitor Citigroup’s funding and liquidity, including 

deposit outflows and borrowings. 

58 Subsequently, similar executive compensation restrictions for all participants in the Capital Purchase Program 

(CPP) were passed as part of the American Recovery and Reinvestment Act of 2009 (in an amendment to the 

Emergency Economic Stabilization Act of 2008). See the American Recovery and Reinvestment Act of 2009, 

Pub. L. No. 111-5, § 7001, 123 Stat. 115, 516-520. 

59 The loan modification procedures were “comparable to those that were being employed at IndyMac Federal 

Bank” (FDIC, Transcript, November 23, 2008). The loan modification program at IndyMac Federal Bank, 

launched in August 2008, was “designed to achieve affordable and sustainable mortgage payments for 

borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans.” 

The modifications would “maximize value” “as well as improve returns to the creditors ... and to investors 

in those mortgages,” and would improve the “mortgage portfolio and servicing by modifying troubled 

mortgages, where appropriate, into performing mortgages” (FDIC, “FDIC Implements Loan Modification 

Program for Distressed IndyMac Mortgage Loans,” Press Release 67-2008, August 20, 2008, https://www. 

fdic.gov/news/news/press/2008/pr08067.html). 

60 FDIC, 2008 Annual Report, 100 (2009), https://www.fdic.gov/about/strategic/report/2008annualreport/ 

arfinal.pdf. 

61 GAO, Regulators’ Use of Systemic Risk Exception, 27. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 85 

On Monday, November 24, the day after the announcement, Citigroup’s stock price rose 

by nearly 58 percent to close at $5.95 (up from $3.77 the previous Friday).62 Also on that 

Monday, in a reversal of the previous trend, the cost of insuring Citigroup’s debt fell: its 

credit default swap spread narrowed by 100 basis points, declining from 460 basis points to 

360 basis points. (In early 2009, however, market confidence in Citigroup again dropped,63 

and the company’s stock price did not recover and stabilize until the spring of 2009, after 

the company had restructured the capital provided through government assistance.)64 

On September 11, 2009, Citigroup asked to terminate the asset guarantee agreement 

and repay the Treasury’s $20 billion TIP investment.65 In assessing the request, the 

banking agencies and Treasury considered Citigroup’s soundness (including the result of 

government mandated stress testing), capital adequacy, and ability to lend. After terms 

were negotiated, a termination agreement was reached on December 14.66 

62 For reference, in October 2008, Citi’s closing stock price ranged from $11.73 to $23. The company’s stock 

price would dip to its lowest of the crisis on March 5, 2009, when it closed at $1.02. 

63 Market confidence dipped as the Bank of America assistance package was announced (January 16, 2009), 

resulting in general uncertainty in the market and uncertainty about Citigroup in particular, which was 

arguably weaker than Bank of America because Citi had required assistance first. Additionally, on January 

16, 2009, Citigroup announced an $8.29 billion net loss in its fourth quarter 2008 financial results. See 

Citigroup, Inc., “Citi Reports Fourth Quarter Net Loss of $8.29 Billion, Loss per Share of $1.72,” Press 

Release, January 16, 2009, http://www.citigroup.com/citi/news/2009/090116a.htm. 

64 In February 2009, the Treasury agreed to exchange its $25 billion in preferred stock obtained under the 

CPP for common stock at an exchange price of $3.25 per share. This exchange was designed to strengthen 

Citigroup’s tangible common equity ratio—a key capital ratio that gained increasing attention from both 

regulators and investors during and after the crisis as an indication of bank health. In July 2009, the Treasury 

and the FDIC exchanged preferred stock obtained under TIP and AGP for trust preferred securities (TruPS) 

to strengthen some of Citigroup’s key capital ratios. See GAO, Regulators’ Use of Systemic Risk Exception, 26; 

and SIGTARP, “Assistance to Citigroup,” 31. 

65 A number of factors influenced the timing of Citigroup’s decision to repay its TIP funds, including other 

large banks’ repayment of TARP funds, Bank of America’s repayment of its TIP funds, and restrictions 

on executive compensation. Five of the nine initial banks participating in the Capital Purchase Program 

under TARP had been allowed by their regulators to repay CPP investments in full on June 17, 2009. 

See SIGTARP, “Assistance to Citigroup,” 33–35; SIGTARP, “Exiting TARP: Repayments by the Largest 

Financial Institutions,” SIGTARP-11-005, September 29, 2011, 39, https://www.sigtarp.gov/Audit%20 

Reports/Exiting_TARP_Repayments_by_the_Largest_Financial_Institutions.pdf; and U.S. Treasury 

Department, Office of Financial Stability, “Troubled Asset Relief Program Transactions Report for Period 

Ending September 16, 2009,” https://www.treasury.gov/initiatives/financial-stability/reports/Documents/ 

transactions-report_09162009.pdf. 

66 Termination of the agreement left the FDIC with $2.225 billion (at a liquidation value of $1,000 per 

share) of TruPS. In 2013, the FDIC exchanged the TruPS for $2.42 billion (principal amount) of Citigroup 

subordinated notes. The exchange resulted in an increase of $156 million in the DIF’s 2013 comprehensive 

income (after netting out unrealized gains of $302 million). Subsequently, the FDIC sold the subordinated 

notes on the institutional fixed-income market for the principal amount of $2.42 billion. For more detail, see 

FDIC, 2013 Annual Report, https://www.fdic.gov/about/strategic/report/2013annualreport/ar13final.pdf). 
86 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The Case of Bank of America 

As the result of Bank of America’s announced acquisition of Merrill Lynch, regulators, as 

well as Bank of America, expected the company to announce larger than anticipated losses 

for the fourth quarter of 2008. A desire to forestall the potential systemic consequences 

led to a third SRE recommendation. (For a timeline of major events related to the Bank 

of America SRE, see Figure 3.3.) 

Figure 3.3. Timeline of Bank of America Events 

2008 Sept. 15, 2008 

September 

Dec. 17, 2008 

December 

2009 

Dec. 31, 2008 

January 

Jan. 15, 2009 

Jan. 16, 2009 

Sept. 21, 2009 

Dec. 2, 2009 

September 

December 

(M) Lehman Brothers Holdings Inc. files for Chapter 11 

bankruptcy protection. Bank of America announces its 

intent to purchase Merrill Lynch & Co. 

(W) Bank of America informs Treasury Secretary Paulson 

that it is considering invoking the material adverse change 

(MAC) clause of the Merrill Lynch merger agreement 

because of larger than anticipated losses at Merrill Lynch. 

(W) Bank of America completes its acquisition of Merrill 

Lynch and it is announced the next day. 

(Th) SRE is recommended to provide assistance to Bank 

of America using an asset guarantee for a selected pool of 

assets ($118 billion) and an additional $20 billion capital 

investment via TARP. 

(F) SRE for Bank of America is announced and Bank 

of America holds its 4th quarter 2008 earnings call, 

announcing Merrill Lynch’s $15.5 billion loss. 

(M) Bank of America terminates the asset guarantee 

program under the SRE. 

(W) Bank of America announces it will repay all 

assistance provided under TARP ($45 billion). 

Source: Adapted from the Federal Reserve Bank of St. Louis’s Financial Crisis Timeline. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 87 

Bank of America’s Acquisition of Merrill Lynch 

As of September 30, 2008, Bank of America Corporation (Bank of America, or BofA) 

owned eight insured banks and four significant non-insured subsidiaries. With $1.4 trillion 

in total assets, Bank of America’s largest bank subsidiary, Bank of America, N.A., was 

the second-largest bank in the United States. Bank of America, N.A., also held more 

than 10 percent of the country’s total domestic deposits and was the largest holder of 

insured deposits.67 

But by the end of 2008, two prominent acquisitions were weighing heavily on the bank’s 

financial performance: the acquisitions of Countrywide Financial and Merrill Lynch. In 

January 2008, BofA had announced its $2.5 billion acquisition of subprime mortgage 

lender Countrywide Financial, a deal that would eventually cost the bank much more 

once the full extent of Countrywide’s mortgage losses became evident. 

On September 15, 2008, Bank of America had announced that it would acquire 

Merrill Lynch. After Lehman Brothers’ failure (occurring the same day as the BofA 

announcement), Merrill Lynch was the weakest of the remaining major investment 

banks, posting net losses of $11.8 billion in the first three quarters of 2008. The losses 

were due partly to losses on mortgage-related securities.68 Just three months after the 

announcement (on December 17, 2008), however, BofA informed the Treasury that 

it was considering invoking the material adverse change (MAC) clause of the merger 

agreement because of larger than anticipated losses at Merrill Lynch.69 The MAC clause 

would have allowed Bank of America to renegotiate the terms of the acquisition or cancel 

it altogether in light of Merrill Lynch’s deteriorating condition. The Treasury and the 

FRB, Bank of America’s regulator, were concerned that Bank of America would not be 

successful in attempting to invoke the MAC clause and that the financial markets would 

react poorly. They cautioned BofA against invoking the clause. Shortly thereafter, the 

FDIC was notified that some form of government assistance for BofA might be necessary, 

and the FDIC worked with the other banking agencies and the Treasury to determine 

what type of assistance might be required. 

Ultimately, Bank of America concluded that there was a serious risk in invoking the 

MAC clause, and on December 31, 2008, the company completed the purchase of Merrill 

Lynch, absorbing significant losses as a result ($15.5 billion in the fourth quarter of 

67 FDIC, “Memorandum to the FDIC Board of Directors Regarding Bank of America,” January 15, 2009, 6, 

http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2009-01-15%20Memo%20to%20the%20FDIC%20 

board%20of%20directors%20from%20Mitchell%20Glassman,%20Sandra%20Thompson,%20Arthur%20 

Murton,%20and%20John%20Thomas%20re%20Bank%20of%20America.pdf. 

68 Federal Reserve Board, “Report Pursuant to Section 129 of the Emergency Economic Stabilization Act of 

2008: Authorization to Provide Residual Financing to Bank of America Corporation Relating to a Designated 

Asset Pool,” 2, January 15, 2009, https://www.federalreserve.gov/monetarypolicy/files/129bofa.pdf. 

69 FCIC, Report, 383. 
88 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

2008).70 On January 9, 2009, officials at the FRB and the Treasury approached the FDIC 

to discuss whether the FDIC would participate in providing government assistance 

beyond that provided in 2008 through broad-based Treasury, Federal Reserve, and FDIC 

programs.71 Bank of America’s stock price had declined approximately 70 percent from 

year-end 2007 to year-end 2008, and the bank was preparing to announce fourth-quarter 

results below market expectations. 

To determine whether assistance was necessary, the FDIC gathered information on 

Bank of America’s losses and current exposures. These losses and exposures included 

subprime exposures at Merrill Lynch and poorly performing nontraditional mortgages 

and home equity loans in high-risk regions of the country at Countrywide Financial 

Corporation (which Bank of America had previously acquired). 

The FDIC requested additional information on Bank of America’s exposures to loss: were 

the exposures in the insured depository institutions and funded with insured deposits, or 

were they exposures stemming primarily from the nondepository investment bank?72 The 

source of the exposures would influence the structure of the assistance to be provided, 

with FDIC assistance dependent on the degree of exposure in Bank of America’s insured 

depository institutions. As with the Citigroup transaction, staff from all the involved 

agencies worked quickly to determine the best available options for assistance. 

The Decision to Recommend the Systemic Risk Exception 

Following Bank of America’s acquisition of Merrill Lynch, regulators were concerned 

about the holding company’s potential short-term liquidity problems, particularly if 

its short-term wholesale funding was not rolled over upon maturity. Additionally, if 

the company’s credit rating were to be downgraded, it would need to post additional 

collateral that it did not have. If Bank of America proved unable to meet its obligations, 

the markets for short-term interbank lending, bank senior and subordinated debt, and 

70 Bank of America Corporation, Earnings Conference Call Transcript on Q4 2008, January 16, 2009, http:// 

online.wsj.com/public/resources/documents/BACTranscript20090116.pdf. 

71 Bank of America and Merrill Lynch: How Did a Private Deal Turn into a Federal Bailout? Part V, Before the 

U.S. House of Representatives Committee on Oversight and Government Reform and the Subcommittee on 

Domestic Policy, 111th Cong. (December 11, 2009) (statement of Sheila Bair, Chairman, Federal Deposit 

Insurance Corporation), 2, https://oversight.house.gov/wp-content/uploads/2012/01/20091211Bair.pdf. 

Acquiring Merrill Lynch added $10 billion in capital from TARP to the $15 billion Bank of America 

had received in October 2008. Bank of America (including Merrill Lynch and Bank of America’s other 

subsidiaries) relied heavily on a variety of available government assistance programs in 2008. Bank of 

America and Merrill Lynch borrowed $88 billion under the Federal Reserve’s collateralized programs and 

$15 billion under the same agency’s Commercial Paper Funding Facility. Bank of America borrowed $92 

billion from the Federal Home Loan Banks (which are discussed in footnote 44). See FCIC, Report, 385. 

Bank of America and its subsidiaries also issued $71 billion in senior debt that was guaranteed by the 

FDIC under the Temporary Liquidity Guarantee Program (including guaranteed debt issued by Merrill 

Lynch before it was acquired by Bank of America). See FDIC, “TLGP Debt Guarantee Program: Issuer 

Reported Debt Details,” https://www.fdic.gov/regulations/resources/tlgp/total_debt.html. 

72 Bank of America and Merrill Lynch, statement of Bair, 3. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 89 

derivative products, among others, could be disrupted, increasing the likelihood of 

deposit runs at banks, larger repo haircuts (larger discounts on asset values when banks 

sold assets subject to repurchase agreements), increased margin requests (which would 

require banks to post additional collateral when they borrowed), and draws on unfunded 

loan commitments (which would be prompted by borrowers’ fears that the lender would 

be unable to fulfill its lending obligations).73 The banking agencies and Treasury believed 

that these consequences would be systemic because of Bank of America’s size and the 

volume of its counterparty transactions. Moreover, given Bank of America’s strong 

reputation, the banking agencies and Treasury feared that its failure could lead to a belief 

that wider problems existed in the banking industry74 and could significantly undermine 

broader business and consumer confidence, thus weakening the overall economy. 

In contrast to the timing in the case of the two previous SREs, the Treasury and banking 

agencies began discussing a potential assistance package in advance of market turmoil. 

With Wachovia and Citigroup, decisionmakers had had very little time to react to the 

companies’ liquidity problems, but because Bank of America was scheduled to hold its 

earnings call on January 16, 2009, decisionmakers had a sense of when potential adverse 

market reactions might occur and had time to prepare a preemptive assistance package. 

After discussing concerns related to Bank of America’s liquidity position, supervisory 

ratings, and potential future losses,75 and in light of the deepening economic recession 

and the risk of negative market reaction to Bank of America’s imminent earnings report 

(as well as the risk of market concerns about the company’s ultimate viability), on January 

15, 2009, the Board of Governors of the Federal Reserve System and the FDIC Board of 

Directors recommended that the Secretary of the Treasury invoke the SRE and allow 

the FDIC to provide open-bank assistance. (As discussed below, the Secretary of the 

Treasury never made a formal SRE determination for Bank of America.) 

Actions Taken under the Exception 

On January 16, 2009, the Treasury and the banking agencies announced an interagency 

assistance package for Bank of America consisting of a capital injection by the 

Treasury and loss protection on a pool of BofA assets by the Treasury, the FDIC, and 

the FRBNY. The structure of the package was similar to the structure of the package 

offered to Citigroup. The Treasury injected $20 billion in capital from TARP (under 

TIP) in exchange for preferred stock. In addition, the Treasury (under AGP), and the 

73 FDIC, “Memorandum Regarding Bank of America,” 2, 8. 

74 Federal Reserve Board and Office of the Comptroller of the Currency, “Memorandum to FDIC on Bank of 

America Corporation Funding Vulnerabilities and Implications for Other Financial Market Participants,” 

January 10, 2009, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2009-01-11%20FDIC%20 

Cox%20Email%20to%20Corston,%20Hoyer%20-%20FW%20Funding%20Vulnerabilities%20Memo.pdf. 

75 FDIC, Transcript, FDIC Closed Board Meeting, January 15, 2009, http://fcic-static.law.stanford.edu/cdn_ 

media/fcic-docs/2009-01-15%20FDIC%20Board%20Meeting%20Transcript.pdf. 
90 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

FDIC (under the authority granted by the SRE) agreed to provide protection against 

the possibility of unusually large losses on a $118 billion asset pool consisting of loans, 

securities backed by residential and CRE loans, and other assets. The asset pool had 

maximum potential future losses of up to $81 billion. 

For the pool of assets under the government guarantee, Bank of America would 

bear the first $10 billion in losses (see Table 3.3). Losses beyond Bank of America’s 

$10 billion first loss position, up to approximately $11.1 billion more, would be shared 

between Bank of America and the government, with Bank of America taking 10 percent 

of losses and the government covering 90 percent (Bank of America’s responsibility 

for potential losses therefore increased by $1.1 billion). The Treasury would cover the 

first $7.5 billion of the government’s share of losses, while the FDIC would cover the 

next $2.5 billion.76 Ninety percent of any further losses (beyond $21.1 billion—$10 

billion plus $11.1 billion) would be financed through a nonrecourse loan from the 

FRBNY, with Bank of America taking the remaining 10 percent. Under the terms of 

the agreement, the FDIC’s portion of risk would be limited in recognition that most 

of the exposures lay within the investment banking entities (that is, the Merrill Lynch 

acquisition) and not Bank of America’s insured depository institutions. The term of 

the loss share guarantee would be ten years for residential assets (loans secured solely 

by 1- to 4-family residential real estate, securities predominantly collateralized by such 

loans, and derivatives that predominantly referenced such securities) and five years for 

nonresidential assets.77 

Table 3.3. Bank of America Asset Guarantee Loss Positions 

First Loss Position Second Loss Position Additional Losses 

Bank of $10 billion 10%, up to 10%, up to 10% 

America $0.83 billion $0.27 billion 

Treasury 90%, up to 

$7.5 billion 

FDIC 90%, up to 

$2.5 billion 

FRBNY 90% 

(nonrecourse loan) 

Subtotal $10 billion $8.33 billion $2.77 billion 

Total $21.1 billion 

76 The Treasury’s share of the asset guarantee was covered under the Asset Guarantee Program, and the FDIC’s 

share was authorized under the SRE. See FCIC, Report, 385. 

77 U.S. Department of the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation, 

“Summary of Terms: Eligible Asset Guarantee (Bank of America),” January 16, 2009, https://www. 

federalreserve.gov/newsevents/press/bcreg/bcreg20090115a1.pdf. 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 91 

As compensation for these guarantees, the Treasury and the FDIC together would 

receive $4 billion in preferred stock and warrants ($3 billion to the Treasury and $1 billion 

to the FDIC, consistent with their respective loss sharing percentages). In addition, Bank 

of America would be prohibited from paying dividends on common stock in excess of a 

penny per share per quarter for three years without government consent. As under the 

assistance agreement for Citigroup, Bank of America would also comply with enhanced 

restrictions on corporate governance and executive compensation (including bonuses) 

that rewarded long-term performance and profitability, and would implement a mortgage 

loan modification program on the assets under guarantee. 

After the announcement of the assistance package on January 16, Bank of America, 

the FDIC, the FRB, and the Treasury began negotiating the specific terms of the asset 

guarantee portion of the package. However, in May, before the parties could finalize 

terms and before the Secretary of the Treasury formally approved an SRE, Bank of 

America asked to terminate the asset guarantee as part of its efforts to reduce its reliance 

on government support and return to normal market funding.78 In September, Bank of 

America paid $425 million to the government as compensation for the benefits it had 

received from the market’s perception that the government would guarantee its assets.79 

Also in September, Bank of America asked to repay its TARP funding (including the 

capital provided under TIP), and in December, after negotiations with regulators, Bank 

of America repaid its TARP funding in full. 

Effects of Recommending the Systemic Risk Exception 

The government support package was announced in tandem with the announcement of 

Bank of America’s fourth-quarter losses. Although the Secretary of the Treasury never 

formally approved an official systemic risk determination for Bank of America, the 

public announcement of planned assistance served as a de facto determination, signaling 

“regulators’ willingness to provide such assistance and may have achieved to some degree 

the intended effect of increasing market confidence in Bank of America.”80 

78 Bank of America, “Bank of America Terminates Asset Guarantee Term Sheet,” Press Release, September 21, 

2009, http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1333936#fbid 

=KdIAO_1PIBQ. 

79 The payments consisted of $276 million to the Treasury, $57 million to the Federal Reserve, and $92 

million to the FDIC. See “Bank of America Termination Agreement,” September 21, 2009, https://www. 

treasury.gov/initiatives/financial-stability/programs/investment-programs/agp/Documents/BofA%20-%20 

Termination%20Agreement%20-%20executed.pdf. 

80 GAO, Regulators’ Use of Systemic Risk Exception, 10. 
92 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Conclusion 

After the announcements of the SREs, funding and liquidity stabilized (not only at the 

individual institutions supported by SREs, but also at other major financial institutions), 

and interbank lending continued (bolstered by the Temporary Liquidity Guarantee 

Program, which required its own SRE [see chapter 2]). 

The severity of the financial crisis and resulting banking crisis, and the extraordinary 

government assistance that followed—which raised concerns about an increase in moral 

hazard and a reduction in market discipline—led to a number of financial reforms, 

including those contained in the Dodd-Frank Act. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 seeks 

to reduce the likelihood that large bank holding companies and other systemically 

significant financial companies will fail in the future. For example, the act mandates 

enhanced risk-based capital and leverage standards for large banking organizations. To 

implement that mandate, banking regulators have adopted new, stronger standards for 

capital at the largest, most systemically important banking organizations. In light of the 

rapid liquidity problems observed at several banking organizations, banking regulators 

have also begun monitoring liquidity at these institutions more frequently and have 

adopted stricter liquidity standards for them. 

But if a systemically important company were nevertheless to fail, Dodd-Frank seeks 

to reduce the adverse effects on financial stability that could result. The act requires 

the largest bank holding companies and systemically significant nonbank financial 

companies to prepare resolution plans, commonly referred to as “living wills.” These 

living wills must demonstrate that the company could be resolved under the Bankruptcy 

Code without severe adverse consequences for financial stability or the economy. The 

living wills also serve to reduce moral hazard by making clear to creditors their potential 

exposure to losses in the event of failure. In addition, the living wills help alleviate the 

persistent dearth of information about firms’ interconnections and interdependencies 

that vexed the Treasury and banking agencies as they were deciding whether to invoke 

SREs during the recent crisis. 

Moreover, for financial companies whose resolution under bankruptcy procedures 

would pose serious risks to financial stability, Dodd-Frank created a back-up resolution 

mechanism, called the Orderly Liquidation Authority (or OLA). The OLA is intended 

to enable the FDIC to wind down and liquidate such a company, while ensuring that 

shareholders, creditors, and culpable management are held accountable and taxpayers 

do not bear losses. 

Dodd-Frank significantly narrowed the scope of the SRE provision that had been 

created in FDICIA (see footnote 1 in this chapter, and the discussion of the SRE provision 

in chapter 2). The law now requires that, for the FDIC to use an SRE, an institution must 

first be placed into receivership, thus eliminating the possibility that an SRE can be used 
CHAPTER 3: Use of Systemic Risk Exceptions for Individual Institutions during the Financial Crisis 93 

to provide open-bank assistance.81 Furthermore, while the FDIC can still establish a debt 

guarantee program applicable to multiple banks (as it did with the Temporary Liquidity 

Guarantee Program), the FDIC’s authority to establish such a program is now separate 

from the SRE authority, and using the authority requires the approval of Congress.82 

81 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376,
 

§ 1106(b), amending 12 U.S.C. § 1823(c)(4)(G) (2016).
 

82 Ibid., § 1105(a), codified at 12 U.S.C. § 5612 (2016), and § 1106(a), codified at 12 U.S.C. § 5613(a) (2016). 
 

94 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

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Part 2: 


Banking Crisis and Response
 
100 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
4
 

Bank Supervision 

Between mid-2007 and September 30, 2008, the U.S. banking industry transitioned from 

a period of record earnings to a severe crisis. The crisis, and the deep recession that 

accompanied it, would make clear the extent to which risks had been building during the 

pre-crisis years at many insured banks and large financial institutions. The crisis would 

result in some 500 bank failures,1 spur a massive program of governmental assistance to 

the financial sector, and engage every bank supervision resource available to the FDIC. 

Throughout this chapter, the terms “regulation,” “supervision,” and “examination” 

appear frequently, and an explanation of these terms is in order. “Regulation” refers to 

the written rules the federal banking agencies apply to the financial institutions subject 

to their jurisdiction.2

 “Supervision” refers to a range of activities that include evaluating 

banks’ financial condition and risk profiles, taking enforcement actions when needed, 

acting on applications received from banks or other parties,3

 and acting in other matters— 

in short, “supervision” refers to the processes by which a banking agency carries out its 

statutory responsibilities to ensure a safe and sound banking industry. “Examination” is a 

subset of supervision, and the word refers to the periodic review, by trained specialists, of 

information obtained from individual banks for the purpose of ascertaining each bank’s 

financial condition, risk profile, and compliance with laws and regulations. 

This chapter describes the history of the crisis from the perspective of bank supervision. 

It starts with the congressional response to the preceding period of crisis in the banking 

industry (the bank and thrift crisis of the 1980s and early 1990s) and with important 

changes, during the interval between the two crises, in the banking industry’s risk profile. 

1 During the six years from 2008 through 2013, the period designated as the crisis years for this study, 489 

banks failed. Of the 37 banks that failed from January 1, 2014 through June 30, 2017, a significant portion 

failed because they never recovered from the effects of the crisis. 

2 The FDIC is the primary federal regulatory agency for state-chartered banks that are not members of the 

Federal Reserve System and for state-chartered thrifts; the Office of the Comptroller of the Currency is the 

primary federal regulator for national banks and federally chartered thrifts; and the Federal Reserve System 

is the primary federal regulator for state-chartered banks that are members of the Federal Reserve System 

and for bank holding companies. 

3 Applications to the FDIC are required in connection with the formation of new insured banks and may be 

required in connection with bank mergers, changes in control, and other matters. 
102 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

It then describes the evolution of the FDIC’s supervision and risk analysis processes in 

the years following the earlier crisis.4 Next, looking at the 2008–2013 crisis itself, the 

chapter describes the characteristics of a sample of banks that failed or became problem 

banks during the crisis, provides a detailed account of the supervisory strategies the FDIC 

mobilized in its response to the challenge of so many weak and failing banks, and discusses 

the effectiveness and appropriateness of supervisory efforts in dealing with troubled banks. 

The chapter concludes with a discussion of lessons learned. The crisis was a test not only of 

the efficacy of bank supervision in addressing a full-blown crisis but also of the supervisory 

processes that had been put in place during the inter-crisis years. In that sense, it provides 

lessons not only for how supervisors can respond to a crisis, but also for the conduct of 

supervision in times of economic prosperity. 

Prelude to the Crisis: Statutory Framework and Banking Conditions 

The end of the protracted banking and thrift crisis of the 1980s and early 1990s is a good 

starting point for tracing the history of the most recent crisis. As in the recent crisis, the 

failure or federal rescue of a large number of banks (more than 2,900 banks and thrifts 

from 1980 through 1994) was a transformative experience. Important legislative changes 

that were enacted during and shortly after that earlier crisis established new mandates 

for FDIC safety-and-soundness supervisors, and resulted in accelerated consolidation 

in the banking industry. In this new landscape, banks would embark on a significant 

expansion of lending activity, particularly real estate lending, and would do so in a way 

that gave rise to significant new risks. 

Statutory Framework 

As the banking and thrift crisis of the 1980s progressed, a widespread perception developed 

among academics and members of Congress that bank and thrift regulators had not taken 

necessary or timely steps to address problems at troubled institutions, or were allowing 

nonviable institutions to remain open indefinitely while the institutions were relying on the 

federal deposit insurance guarantee to attract deposits. 

Congress addressed these concerns in the Financial Institutions Reform, Recovery, 

and Enforcement Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation 

Improvement Act of 1991 (FDICIA). Together, these statutes established a comprehensive 

set of expectations for more effective regulation and supervision of banks in the aftermath 

of the 1980s banking and thrift crisis. 

The risk analysis processes discussed in this chapter do not include the FDIC’s system of risk-based deposit 

insurance assessments. That system is discussed at length in chapter 5. 

4 
CHAPTER 4: Bank Supervision 103 

Among other things, FIRREA increased and clarified the FDIC’s authorities as insurer 

and receiver for failed institutions, most notably by abolishing the Federal Savings 

and Loan Insurance Corporation (FSLIC) and transferring its deposit insurance and 

resolution responsibilities for thrifts to the FDIC. FIRREA also restricted the acceptance 

of brokered deposits by troubled banks. “Brokered deposits” are, roughly speaking, 

deposits solicited and placed at a bank by an outside party, for a fee.5 The 1980s thrift 

crisis highlighted concerns about such deposits as it became evident that, because of 

the federal deposit insurance guarantee, economically nonviable institutions could use 

such deposits to stay open almost indefinitely. FIRREA also allowed the FDIC to recover 

part of its cost of liquidating a failed institution by seeking reimbursement from other 

commonly controlled insured institutions.6

 Banks’ obligation to reimburse the FDIC 

under such circumstances became known as “cross-guarantee liability.” 

Among the many provisions of FDICIA, Congress (1) required the federal banking 

agencies to conduct a full-scope on-site safety-and-soundness examination at least once 

per year for every bank (or once every 18 months for smaller banks meeting certain 

conditions) and to maintain enough well-trained examination staff to adhere to that 

schedule;7 (2) established requirements for prompt corrective action on the part of the 

federal regulators and required each bank with assets greater than $150 million to obtain 

an annual audit of its financial statements by an independent public accountant; and (3) 

directed the agencies to develop standards for safety and soundness and for real estate 

lending as well as regulations requiring appraisals for real estate transactions. With 

the prompt corrective action requirements, Congress directed the agencies—giving 

particular responsibility to the FDIC—to address and “resolve the problems at insured 

depository institutions at the least possible long-term loss to the deposit insurance fund.”8 

Accordingly, taking prompt corrective action to address problems at troubled banks was 

an important goal for the FDIC (and the federal banking agencies more generally) in 

addressing the recent crisis. 

5 The large body of legal opinions and precedents regarding brokered deposits is beyond the scope of this 

chapter. 

6 Depository institutions are “commonly controlled” if such institutions are controlled by the same company 

or if one depository institution is controlled by another. A person is not a company, but certain trusts can be 

considered companies under the Bank Holding Company Act. 

7 Section 111(a) of FDICIA requires annual (or every 18 months for certain smaller banks) full-scope onsite safety-and-soundness examinations; and Section 111(d) of FDICIA requires agencies to ensure that the 

training and number of staff are sufficient for examinations to be objective and thorough. 

8 Section 131 of FDICIA. The quoted language is from the beginning of Section 131 describing the purpose 

of the section. Thus, it refers broadly to the prompt corrective action requirements and not narrowly to 

the term “least cost resolution” referenced in chapter 6. In addition, although the quoted language refers to 

the deposit insurance fund, after the FSLIC was abolished by FIRREA and until 2006 there were two FDIC 

deposit insurance funds, one for banks and one for savings associations. They were combined into one—the 

Deposit Insurance Fund (DIF)—in 2006. In this chapter, references to the DIF before 2006 are intended as 

generic references to either fund. 
104 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

By 1994, when the banking and thrift crisis had subsided, Congress turned its attention 

toward issues of banking industry structure. The Riegle-Neal Interstate Banking and 

Branching Efficiency Act of 1994 significantly eased federal restrictions on banks’ ability to 

open branches across state lines. The Gramm-Leach-Bliley Act, enacted in 1999, removed 

most federal restrictions on affiliations between banks, investment banks, and insurance 

companies. An argument advanced for both Riegle-Neal and Gramm-Leach-Bliley was that 

they would lead to more-diversified financial institutions and that greater diversification 

would make the institutions less subject to the problems that had afflicted smaller, less 

diversified, and geographically concentrated institutions during the crises of the 1980s and 

early 1990s. These changes contributed to an increase in the size and interconnectedness 

of financial institutions. 

Banking Conditions 

As just suggested, Riegle-Neal and Gramm-Leach-Bliley contributed to significant 

structural changes in the U.S. banking industry, including a wave of consolidation 

that resulted in a substantial reduction in the number of insured institutions and a 

concomitant increase in the size of the largest ones. The consolidation of charters within 

banking companies, which occurs when legally separate but commonly owned banks 

are converted into multiple branches of a single bank, had begun in the 1980s with 

the relaxation of state branching laws, and Riegle-Neil facilitated the trend. Between 

1994 (the passage of Riegle-Neal) and 2006 (the last of a succession of record-breaking 

earnings years for the banking industry before the crisis), the number of FDIC-insured 

institutions decreased from 12,604 to 8,681; as a result of strong loan growth, the 

industry’s assets increased from $5 trillion to $11.9 trillion; the asset size of the largest 

insured bank increased from $210 billion to $1.2 trillion; and the percentage of insured 

banks’ assets held by the ten largest insured banks increased from 20 percent to 45 

percent. The effect of Gramm-Leach-Bliley was to facilitate the growth of large bank 

holding companies (BHCs) through affiliations. At year-end 1994 the largest BHC had 

assets of $250 billion. By year-end 2006, the largest had assets of $1.9 trillion (as noted 

in chapter 2, during the crisis the FDIC would guarantee certain liabilities of bank 

holding companies). 

Banking industry consolidation in the inter-crisis years occurred against a backdrop 

of economic prosperity. The ten-year period from year-end 1996 to year-end 2006 was 

one of rapid increases in home prices. Nominal GDP grew at a brisk annualized rate of 

5.4 percent during that decade, while loans outstanding at FDIC-insured institutions 

grew at an annualized rate of 7.5 percent. (Given the problems that banks would soon 

experience, it is noteworthy that acquisition, development, and construction [ADC] 

lending grew especially fast, at an annualized rate of nearly 19 percent for the ten-year 
105 

9 

CHAPTER 4: Bank Supervision 

period.)9 During the same decade, insured institutions’ earnings grew at an annualized 

rate of 11 percent and set new records in every full year from 2001 through 2006.10 

At larger institutions, earnings records were driven in part by the securitization (and, 

for some institutions, the origination) of Alternative-A (Alt-A) and subprime mortgages 

(see chapter 1). Reciprocally, the mortgage securitization pipeline, which contributed to 

seemingly unlimited liquidity for mortgage-related assets, was fueled by the activities of 

a number of the largest financial institutions in the United States, including thrifts, U.S. 

and foreign banking organizations,11 and investment banks, and, it could be argued, by 

the activities of rating agencies and providers of financial guarantees of the performance 

of these assets. 

Subprime lending became an important risk for some banks well before the full onset 

of the crisis in 2008. In February 2000, the FDIC estimated that approximately 140 banks 

had significant exposures in the subprime lending business. Although those institutions 

represented just over 1 percent of all insured institutions, they accounted for nearly 20 

percent of all problem institutions—those with CAMELS ratings of 4 or 5.12 Of the 22 

banks that failed between 1997 and September 2001, 8 had significant subprime lending 

portfolios, foreshadowing, to an extent, the broader systemic risks that subprime and 

nontraditional mortgages would present in 2007 and 2008. Among these 8 banks were 

BestBank in Boulder, Colorado, which held subprime credit card receivables; First 

National Bank of Keystone in Keystone, West Virginia, which held retained interests 

in subprime mortgage loans; Pacific Thrift and Loan Company in Woodland Hills, 

California, which held retained interests in subprime mortgage loans; and Superior Bank 

FSB, in Hinsdale, Illinois, which held retained interests related to the securitization of 

subprime mortgages. 

ADC loans are loans to finance the acquisition of raw land, land development, or real estate construction 

projects. Historically the repayment performance of ADC loans has tended to be more sensitive to adverse 

changes in economic or market conditions than has the repayment performance of other loan categories. 

10 For the new records set by earnings, see FDIC, Quarterly Banking Profile, Q4 2006. 

11 In this chapter, the term “banking organization” will be used to encompass both banks and bank holding 

companies, and the terms “bank” and “insured bank” will be used interchangeably to refer to all FDICinsured depository institutions—including both banks and thrifts—unless the context makes clear that a 

distinction is being drawn among different insured-bank charter types. 

12 Hearings on Recent Bank Failures and Regulatory Initiatives Before the House Committee on Banking and 

Financial Services, 106th Cong. (February 8, 2000) (statement of FDIC Chairman Donna Tanoue), http:// 

archives.financialservices.house.gov/banking/2800tan.shtml. CAMELS stands for Capital adequacy, Asset 

quality, Management, Earnings, Liquidity, and Sensitivity to market risk. (The “S” component was added in 

1996.) Bank supervisory ratings, or CAMELS composite ratings, are on a scale of 1 to 5, with a 1-rating being 

the highest and indicating the greatest strength in performance and risk management and the lowest level of 

supervisory concern. At the other end of the scale, a 5-rating is the lowest rating and indicates the weakest 

performance, inadequate risk management, and the highest level of supervisory concern. The CAMELS 

composite rating is derived from an evaluation of the six CAMELS components; although the composite 

rating is generally a close reflection of the assigned component ratings, it is not an arithmetic average of the 

component ratings. 
106 

1996Q4 1998Q4 

2000Q4 

2002Q4 

2004Q4 

2006Q4 

2008Q4 

2010Q4 

2012Q4 

2014Q4 

2016Q4 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Small banks (those having total assets of under $10 billion) generally were not involved 

in subprime and nontraditional mortgages. Earnings at small banks were driven largely by 

growth in traditional lending categories, particularly real estate lending. The proportion of 

small banks’ loan portfolios that was secured by real estate increased from about 61 percent 

to about 75 percent from year-end 1996 through year-end 2006. Growth in commercial 

real estate (CRE) and in ADC lending was particularly noteworthy: during that decade, 

CRE loans outstanding (excluding ADC) at small banks grew at an annualized rate of 6.3 

percent, while ADC loans grew at an annualized rate of 15 percent. As a result, ADC loans 

outstanding at small banks increased from 4 percent of loans outstanding at these banks to 

15 percent (see Figure 4.1). 

Figure 4.1. Real Estate Loans as a Percent of Total Loans, 1996–2016 (Banks with 

Total Assets < $10 Billion) 

% Total Loans 

40 

35 

30 

25 

20 

15 

10 

5 

0 

Residential 

Other CRE 

ADC 

Multi-Family 

Agriculture 

Note: "Other CRE" refers to real estate loans secured by nonfarm nonresidential properties. 

By 2004, the tide of rising housing prices and favorable economic conditions was buoying 

up the financial performance of almost all banks. Between midyear 2004 and early February 

2007, no FDIC-insured bank failed. And as of year-end 2006, the FDIC’s Quarterly Banking 

Profile reported that of a total of 8,681 banks with assets of $11.9 trillion, only 50 were on 

the FDIC’s problem-bank list, with total assets of $8.3 billion.13 Throughout 2006, only 

about one-half of 1 percent of banks were on the problem list, the lowest percentage for any 

year for which these data are available (1980–2017), suggesting, incorrectly as it turned out, 

that the risk profile of the banking industry was at a historic low. 

13 “Problem banks” are FDIC-insured depository institutions assigned a CAMELS rating of 4 or 5; see note 12 

for an explanation of these ratings. 
CHAPTER 4: Bank Supervision 107 

Prelude to the Crisis: The Safety-and-Soundness Examination

Program 

As the risk profile of the banking industry evolved in the years between the previous 

banking crisis and the more recent one, the FDIC’s safety-and-soundness examination 

program evolved as well. During the years between the two banking crises, two broad 

themes shaped the program. One theme was an effort to benefit from the lessons learned 

during the crisis of the 1980s and early 1990s. The other was an effort to avoid placing 

undue burden on banks. 

Benefiting from lessons learned meant, among other things, a focus on ensuring 

prompt supervisory action to address deficient risk management practices at banks before 

those deficiencies resulted in a bank’s condition deteriorating beyond repair. In addition, 

organizational and policy changes were made to strengthen the FDIC’s risk analysis 

capabilities. Avoiding undue burden on banks meant streamlining the examination process 

at institutions that the FDIC believed had a low risk-profile. 

Timely Corrective Action 

One of the most important lessons flowing from the crisis of the 1980s—a lesson that 

directly affected bank supervision during the 2008–2013 crisis and that affects bank 

supervision today—is the need for supervisors to take timely corrective action to 

address problems at troubled banks and, more broadly, the need to correct banks’ risk 

management deficiencies before these deficiencies do substantial harm. 

In 1993, the federal bank and thrift regulators published a revised uniform common 

core report of examination that highlighted the importance of timely steps by banks to 

address weaknesses in risk management practices.14 Though each agency had its own set 

of instructions, the interagency group developed common definitions for parts of the 

core report in order to ensure accurate and consistent presentation of that information— 

and, importantly, the new uniform report introduced the “Matters Requiring Board 

Attention” page to focus the attention of the bank’s board and management on material 

issues requiring immediate consideration.15 

In 1995 the FDIC took another step emphasizing the importance of a proactive 

assessment of banks’ exposure to and management of credit risks, when FDIC examiners 

began completing an “underwriting standards” survey at each examination. The survey, 

still in use today, reflects an examiner’s view of bank management’s ability to identify, 

measure, monitor, and control credit risks in various types of lending. This focus on 

loan underwriting standards is designed to serve as an early-warning mechanism for 

identifying future problems. 

14 FDIC, “Regulators Adopt Common Format for Examination Reports,” Financial Institution Letter, FIL-72­

93, October 19, 1993. 

15 Further discussion of MRBAs is available in “Supervisory Trends: ‘Matters Requiring Board Attention’ 

Highlight Evolving Risks in Banking,” FDIC, Supervisory Insights, Summer 2014. 
108 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

In 1996, the Federal Financial Institutions Examination Council issued an important 

clarification of examination and supervision policy when it revised its Uniform Financial 

Institutions Rating System, which had been introduced in 1979.16 The changes added a 

new component rating, the “S” rating for sensitivity to market risk, to the five previous 

components, expanding the acronym CAMEL to CAMELS.17 More broadly, the 1996 

changes were designed to make sure that both bankers and examiners understood that 

CAMELS ratings were based not only on a bank’s current financial indicators (e.g., 

earnings, capital, and nonperforming assets) but also on its risk profile, which is influenced 

by the bank’s loan underwriting, internal controls, degree of exposure to market risk, and 

other factors. Thus, for example, a well-capitalized and profitable institution could still 

be assigned a composite rating of 3 if the examiner found risk controls to be weak or the 

bank to be inadequately managed. 

In 1997, the FDIC, in conjunction with the Federal Reserve Board and the Conference 

of State Bank Supervisors, began implementing a new risk-focused examination process 

designed to direct bank examinations and examination resources at whichever bank 

functions posed the greatest risk exposure at the particular institution. Identifying the 

functions that pose the greatest risk exposure is part of what an examination is about, 

and depends on the business model and risk mitigation strategies, or the weaknesses 

thereof, at each individual institution. 

As already noted, the risk-focused examination process attempts to assess an 

institution’s ability to identify, measure, evaluate, and control risk. This process recognizes 

that in a rapidly changing environment, a bank’s financial condition at any given time 

may not indicate the bank’s future performance, and so the risk-focused examination 

process seeks to strike an appropriate balance between evaluating the financial condition 

of an institution at a certain time and evaluating the soundness of the bank’s processes for 

managing risk. For if management’s risk controls are properly designed and effectively 

applied, they should help ensure that the bank’s future performance will be satisfactory. 

(Moreover, for well-run banks the risk-focused approach may involve less regulatory 

burden because examiners will be testing, rather than duplicating, the work of the bank’s 

own audit and management review functions.) 

In 2000, the FDIC implemented new on-site supervision processes for large FDICsupervised banks (banks with assets greater than $10 billion; the role of the FDIC with 

respect to large banks not supervised by the FDIC is discussed below, in the section 

titled “Large-Bank Risk Assessment”).18 In light of the banking industry’s ongoing 

consolidation and evolution toward larger and more complex institutions, the FDIC 

16 “Uniform Financial Institutions Rating System,” 61 Fed. Reg. 67021–67029 (Dec. 19, 1996), https://www. 

gpo.gov/fdsys/pkg/FR-1996-07-18/pdf/96-18187.pdf. 

17 Again, see footnote 12 for a brief explanation of the ratings system. 

18 See that same section for an explanation of which federal agency supervises which category of banks. 
CHAPTER 4: Bank Supervision 109 

determined that an on-site presence beyond traditional “snapshot” examinations is 

generally necessary to effectively monitor certain larger state institutions that are not 

members of the Federal Reserve System. The new program emphasized the importance 

of supervisory plans that were dynamically updated to address the evolving risks of 

larger and more complex institutions: generally, the examination process for large banks 

consisted of a series of targeted reviews of key business lines and risk areas, based on 

an annual supervisory plan, with the findings of these activities incorporated into the 

annual report of examination. Examiners were instructed to focus their most intense 

efforts on, among other things, the presence of rapid asset growth, asset concentrations, 

and internal control weaknesses—in other words, indicators that may reflect increasing 

risks at a bank. 

The changes in the supervisory process discussed in this section were designed to 

sharpen FDIC supervisors’ sensitivity to the importance of banks’ risk management 

practices. Addressing weaknesses in banks’ risk management practices in a timely manner 

is important, because if supervisors do not address weaknesses in risk management 

until after a bank’s condition deteriorates, it is often too late to prevent that bank from 

failing. The result may be an increase in costs to the Deposit Insurance Fund (DIF) for 

reimbursing insured depositors of the failing bank and for resolving the failed bank. (On 

the Deposit Insurance Fund, see chapter 5. On resolutions, see chapter 6.) And if the 

institutions whose problems are allowed to go unaddressed are very large, a financial 

crisis may ensue with deep and widespread economic repercussions. 

In short, at the beginning of the decade that preceded the 2008–2013 banking crisis, 

a fundamental supervisory goal of the FDIC (and the other federal banking agencies) 

was to be proactive, attempting to address deficiencies in risk management at an early 

stage. As discussed below, in the aftermath of the crisis the FDIC has reemphasized 

this fundamental goal. 

Reduction of Regulatory Burden 

The second broad theme driving changes to the safety-and-soundness examination 

program was the desire to reduce the regulatory burden associated with the examination 

process, especially for smaller, lower-risk institutions. Efforts to reduce burden included 

economizing on the overall level of resources devoted to bank examination and 

supervision, and streamlining examination procedures for smaller, well-rated banks. 

The FDIC’s burden reduction efforts included a 2002 Corporate Performance 

Objective (CPO) to reduce by 20 percent the average time spent conducting safety-andsoundness examinations of 1- and 2-rated banks with assets less than $250 million.19 

A subsequent CPO called for an additional 10 percent to 20 percent reduction in 

examination hours compared with then-current benchmarks for banks with a CAMELS 

19 The FDIC’s expectation of this 20 percent reduction in examination hours was communicated in FDIC, 

“Reducing Burden on Banks and the Public,” Financial Institution Letter, FIL-36-2002, April 24, 2002. 
 

110 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

rating of 1 or 2. To create incentives to meet these goals, regional and territory offices 

were ranked on the basis of their success in reducing the time spent examining banks; 

processing examination reports, applications, and enforcement actions; and meeting 

other efficiency measures. To help achieve the CPO, a new Maximum Efficiency RiskFocused Institution Targeted (MERIT) examination program was introduced in 2002; 

it encouraged streamlined loan review and the limited use of a number of examination 

procedures. Examiners were encouraged to use the streamlined MERIT procedures for 

a narrowly defined set of eligible banks, and for other institutions as appropriate. The 

MERIT examination program was discontinued in 2008, in part because of concerns 

it was being implemented in a way that reduced the rigor of some examinations to an 

extent that had not been intended. 

Efforts to Enhance Risk Analysis Capabilities 

The FDIC’s effort to learn from the experience of the earlier crisis was reflected not 

only in changes to its examination programs but in organizational changes and other 

efforts to improve the quality of its risk analysis capabilities, its expertise regarding more 

complex banking activities, and its off-site monitoring systems. 

A first step in this evolution was the FDIC’s establishment in 1995 of a new Division 

of Insurance (which subsequently merged with the already existing Division of Research 

and Statistics to become the Division of Insurance and Research). In addition to 

administering the FDIC’s risk-based deposit insurance pricing system (see chapter 5), 

the new Division stationed a small interdisciplinary staff of seasoned bank examiners, 

regional economists, and analysts in each of the (at the time) eight FDIC regional offices 

and Washington, DC.20 Their charge was to bridge the gap between the analysis of broad 

economic and market trends and the micro perspective of individual bank examinations. 

Staff in these offices published a Regional Outlook designed to heighten banker and 

examiner awareness of emerging regional risks and trends. These staff members also 

served as a resource for management, both in the regions and in Washington, on 

economic conditions affecting insured banks. 

In 1997, to align the FDIC’s organizational structure with an industry that was 

consolidating across state lines, the FDIC established a new Case Manager position in 

the regional offices. Each Case Manager is assigned a caseload of banking organizations 

and is responsible for keeping abreast of developments at these organizations by regularly 

reviewing financial reports, the results of off-site monitoring systems, and examination 

reports, and by maintaining contact with counterparts at other bank regulatory agencies 

or the bank. This review by the Case Manager supplements the on-site FDIC examination, 

which may occur as infrequently as once every three years if the FDIC alternates 

20 As of June 30, 2017, the FDIC had six regional offices, located in New York City, Atlanta, Chicago, Dallas, 

Kansas City, and San Francisco. These, along with offices in Boston and Memphis, constituted the eight 

regional offices referenced in the text. 
CHAPTER 4: Bank Supervision 111 

examinations with its state counterparts. The FDIC also created a number of subjectmatter specialist positions in the regional offices to help ensure that if complex issues 

arose at individual institutions during an examination, an adequate level of expertise 

existed to address them. Such specialist positions were created in the areas of capital 

markets, accounting, trust, and information technology. 

In 2003, the FDIC created a National Risk Committee (NRC), a cross-divisional body 

of senior managers established to identify and evaluate major business risks facing the 

banking industry and the insurance funds (as noted in footnote 8, until 2006 there were 

two deposit insurance funds). Risk committees in the regions delivered regular regional 

risk reports to the NRC. A successor structure of regional and national risk committees 

exists at the FDIC today. 

Increased emphasis was placed on the review of banks that were outliers according to 

the FDIC’s off-site monitoring tools. The term “off-site monitoring” is used here to refer 

to a specialized subset of the more general concept of risk analysis, namely, the periodic 

and systematic analysis of data from the quarterly Consolidated Report of Condition 

and Income (Call Report). Off-site monitoring tools used then and still used include 

(1) a Statistical CAMELS Offsite Review (SCOR) model designed to make it easier to 

identify signs of potential financial deterioration at a bank,21 (2) a Growth Monitoring 

System to flag for further off-site review the banks that were growing most rapidly, and 

(3) a Real Estate Stress Testing (REST) model to help identify institutions that were more 

susceptible to the types of real estate–related problems that had played a major role in 

the 1980s banking crisis.22 

The development and use of such tools allows for a quarterly analysis of the financial 

data reported by all insured banks to identify signs of deteriorating performance or undue 

risk-taking; this review is an important supplement to the relatively infrequent on-site 

examinations. Such off-site systems help ensure that potential issues are systematically 

brought to the attention of safety-and-soundness staff: regional staff is asked to review 

institutions that are flagged as outliers relative to the off-site indicators and to recommend 

additional supervisory attention where warranted. 

Retrospectively, one can see that these enhanced risk-analysis processes brought 

important issues to the attention of bankers, examiners, and policymakers. Examples 

include two FDIC publications in 1997, one on subprime lending and the other on Trust 

21 The SCOR model is described in Charles Collier, Sean Forbush, Daniel A. Nuxoll, and John O. Keefe, “The 

SCOR System of Offsite Monitoring: Its Objectives, Functioning, and Performance,” FDIC Banking Review 

15, no. 3 (2003): 17–32, https://www.fdic.gov/bank/analytical/banking/2003sep/2_15n3.pdf. 

22 The REST model is described in Charles Collier, Sean Forbush, and Daniel A. Nuxoll. “Evaluating the 

Vulnerability of Banks and Thrifts to a Real Estate Crisis,” FDIC Banking Review 15, no. 4 (2003): 19–36, 

https://www.fdic.gov/bank/analytical/banking/2003dec/2_15n4.pdf. 
112 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Preferred Securities23 and associated risks.24 A number of other FDIC publications, 

including one published in the first quarter of 1999 and one in the third quarter of 2000, 

highlighted the risk of overbuilding in several major metropolitan markets (some of 

which subsequently experienced severe real estate downturns) and identified concerns 

about new, higher-risk mortgage lending practices.25 A publication in the first quarter 

of 2002 discussed concerns about mortgage underwriting, concentrated lending 

exposures to finance the development of vacant lots, and potential credit risks facing 

ADC lenders in particular metro markets, including Atlanta and San Francisco (markets 

that would experience high rates of bank failure during the crisis).26 On the other hand, 

a publication in the spring of 2004 discussed the risk of a bubble in national housing 

prices but concluded, on the basis of information through 2003, that such a bubble was 

not underway and was unlikely to develop.27 

Internal risk metrics such as the REST model mentioned above flagged increasing 

industry vulnerability to economic downturns associated with growing concentrations 

in ADC lending. In 2003, as concerns about ADC concentrations grew, staff undertook 

a horizontal review of risk exposures associated with ADC lending in the Atlanta 

metropolitan area. The review identified concerns with risk management practices but 

concluded that risks were mitigated because the ADC lending exposures were primarily 

to finance the development of residential subdivisions to meet the housing demands of 

an increasing population. What was not so readily apparent was the significant reliance 

on subprime and nontraditional mortgages in supporting market activity. The pipeline 

for this problematic mortgage credit was fed by nonbank mortgage originators and by the 

activities of large investment banks, large thrifts, and large BHCs. It was hard for small 

23 Trust Preferred Securities are discussed in the section below titled “Strategies to Insulate Banks from 

Problems at BHCs.” 

24 Kathy R. Kalser and Debra L. Novak, “Subprime Lending: A Time for Caution,” Regional Outlook, San 

Francisco, Q3 1997, https://www.fdic.gov/bank/analytical/regional/ro19973q/sf/infocus1.html; and Kathy R. 

Kalser, “Financial Markets,” Regional Outlook, San Francisco, Q4 1997, https://www.fdic.gov/bank/analytical/ 

regional/ro19973q/sf/finmkt.html. 

25 Steven Burton, “Commercial Development Still Hot in Many Major Markets, but Slower Growth May Be 

Ahead,” FDIC Regional Outlook National Edition, Q1 1999, https://www.fdic.gov/bank/analytical/regional/ 

ro19991q/na/infocus2.html. Robert Burns and Sarah Zachary, ”Ranking Metropolitan Areas at Risk for 

Overbuilding,” FDIC Regional Outlook National Edition, Q3 2000, https://www.fdic.gov/bank/analytical/ 

regional/ro20003q/na/infocus1.html. Alan Deaton, “Rising Home Values and New Lending Programs Are 

Reshaping the Outlook for Residential Real Estate,” FDIC Regional Outlook National Edition, Q3 2000, 

https://www.fdic.gov/bank/analytical/regional/ro20003q/na/infocus2.html. 

26 Scott Hughes, Judy Plock, Joan Schneider, and Norman Williams, “In Focus this Quarter: Housing Market 

Has Held Up Well in this Recession, but Some Issues Raise Concern,” FDIC Regional Outlook National 

Edition, Q1 2002, https://www.fdic.gov/bank/analytical/regional/ro20021q/na/infocus.html. 

27 Scott Hughes, Jack Phelps, Allen Puwalski, and Norman Williams, “Housing Bubble Concerns and the 

Outlook for Mortgage Credit Quality,” FDIC Regional Outlook National Edition, Spring 2004, https://www. 

fdic.gov/bank/analytical/regional/ro20041q/na/infocus.html. 
CHAPTER 4: Bank Supervision 113 

banks, for builders, and indeed for bank supervisors to appreciate just how dependent on 

the continued operation of this pipeline the ADC exposures really were.28 

In March 2005, as part of the FDIC’s formal risk analysis process, staff raised significant 

concerns about trends in mortgage credit and the unsustainable appreciation of housing 

prices. Specifically, staff expressed concerns to the FDIC’s National Risk Committee 

about the rapidity with which house price appreciation was outstripping income 

growth by a widening margin in high-cost metro areas, and about the rising fraction 

of credit attributable to subprime mortgages, alternative mortgage products designed 

to minimize initial payments, home-equity loans, and houses purchased by investors. 

The memorandum to the Committee stated, “The situation is beginning to look like a 

credit-induced boom in housing that could very well result in a systemic bust if credit 

conditions or economic conditions should deteriorate.”29 The response recommended by 

staff was further research on trends in home prices and mortgage credit, the development 

of guidance to banks and examiners, and public communication. 

In May 2005, the FDIC published a discussion of these issues that drew connections 

between the rapid escalation of home prices and the pricing and terms of mortgage 

credit.30 The FDIC also joined with the other federal banking agencies in issuing 

supervisory guidance addressing the significant and rising risks associated with banks’ 

real estate exposures: in January 2006, the agencies published for comment proposed 

interagency guidance relating to sound risk management practices for concentrations 

in commercial real estate lending; in September 2006 they published the “Interagency 

Guidance on Nontraditional Mortgage Product Risks;” and in December they 

finalized and published the guidance that had been proposed in January (the published 

document was called “Concentrations in Commercial Real Estate Lending, Sound 

Risk Management Practices.”)31 As it turned out, however, in the summer of 2006 the 

S&P/Case-Shiller U.S. National Home Price Index had already peaked and begun its 

multiyear decline. 

28 As it turned out, demand for vacant lots in Atlanta collapsed in 2007 shortly after subprime and nontraditional 

mortgage originations were sharply curtailed. For further information, see “Commercial Real Estate,” Hearing 

Before the Congressional Oversight Panel, 111th Cong. (January 27, 2010, held in Atlanta, Georgia) (statement 

of Doreen Eberley, Acting Atlanta Regional Director, Federal Deposit Insurance Corporation), https://www. 

gpo.gov/fdsys/pkg/CHRG-111shrg55522/pdf/CHRG-111shrg55522.pdf. 

29 FDIC, “Memorandum to the FDIC National Risk Committee: Rising Risks in Housing Markets,” 

2005, from Richard A. Brown, Chief Economist, http://fcic-static.law.stanford.edu/cdn_media/fcicdocs/2005-03-21%20FDIC%20Memo%20from%20Richard%20Brown%20to%20the%20National%20 

Risk%20Committee-%20Rising%20Risks%20in%20Housing%20Markets.pdf. 

30 Cynthia Angell and Norman Williams, “FYI Revisited: U.S. Home Prices: Does Bust Always Follow 

Boom?,” FDIC, FYI, May 2, 2005, https://www.fdic.gov/bank/analytical/fyi/2005/050205fyi.html. 

31 Interagency final joint guidance, “Concentrations in Commercial Real Estate Lending, Sound Risk 

Management Practices,” 71 Fed. Reg. 74580–74588 (Dec. 12, 2006), https://www.gpo.gov/fdsys/pkg/FR2006-12-12/pdf/06-9630.pdf. “Interagency Guidance on Nontraditional Mortgage Product Risks,” 71 Fed. 

Reg. 58609–58618 (Oct. 4, 2006), https://www.gpo.gov/fdsys/pkg/FR-2006-10-04/pdf/06-8480.pdf. 
114 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

To put this section’s discussion of risk analysis processes into context, the FDIC, like 

most other observers, did not manage to connect the dots among the trends that were 

developing with regard to home prices, alternative mortgage credit products, off-balancesheet securitization vehicles, interconnected credit derivatives exposures, and increased 

financial leverage and reliance on short-term funding (for a detailed discussion of these 

subjects, see chapter 1). So although it is important to supplement the examiners’ banklevel view of risk with risk assessment of broad external trends, consensus on the most 

important risks in the financial system and on the urgency of those risks at any given 

time is likely to be elusive. 

As noted above, some pre-crisis analyses pointed directly to the way nontraditional 

mortgages were contributing to a potential housing bubble. Yet such examples illustrate 

the significant difference between identifying a risk and developing an agency-wide or 

interagency consensus for policy action to address that risk. Agency action to change 

or curtail risky but currently profitable banking industry practices tends to encounter 

significant external resistance. Decisions on whether and how to take such action are 

within the purview of the senior management of an agency. That such decisionmaking 

can be informed and enhanced by sound risk analysis was a guiding principle for the 

FDIC’s risk assessment efforts during the pre-crisis years and continues to be so today. 

Large-Bank Risk Assessment: Before and into the Crisis 

Although a majority of FDIC-insured institutions are supervised by the FDIC, most of 

the assets of insured institutions are held by banks and thrifts that the FDIC does not 

supervise. The reason has to do with the distribution in U.S. law of bank regulatory 

responsibilities across agencies. Specifically, FDIC-insured depository institutions that 

are federally chartered—i.e., national banks and federal thrifts—are supervised by the 

Office of the Comptroller of the Currency (OCC), and these institutions include most 

of the largest FDIC-insured institutions. State-chartered banks that are members of 

the Federal Reserve System—state member banks—and bank holding companies are 

supervised by the Federal Reserve. State-chartered banks that are not members of the 

Federal Reserve System—state nonmember banks—and state thrifts are supervised 

by the FDIC. (Before the enactment, in 2010, of the Dodd-Frank Act, another federal 

regulator—the Office of Thrift Supervision [OTS]—supervised federal and state thrifts, 

except for state-chartered mutual savings banks, which were supervised by the FDIC. 

The Dodd-Frank Act abolished the OTS.) As of June 30, 2017, there were 5,787 FDICinsured banks, and the FDIC was the primary federal regulatory agency for about 64 

percent of them. Most of the banks the FDIC supervises are small, a category defined as 

having assets of less than $10 billion. (Bank asset sizes range from more than a trillion 

dollars for the largest banks to under $100 million for the smallest banks.) 

Larger institutions can pose outsized risks to the DIF: of the 489 banks that failed 

during the crisis years 2008–2013, only 9 had assets of more than $10 billion, but these 
 

CHAPTER 4: Bank Supervision 115 

9 institutions accounted for 35 percent of all losses the DIF experienced during that 

time.32 Thus, one function of the FDIC’s supervision program is to maintain a level of 

awareness of significant risks and developments at large non-FDIC-supervised banks. 

This function has mostly been carried out through off-site analysis and the exercise of 

special examination authority as granted by Congress in 1950 under Section 10(b)(3) of 

the Federal Deposit Insurance Act. “Special examination authority” refers to the FDIC’s 

statutory authority to conduct an examination of an FDIC-insured institution for which 

it is not the primary federal regulator (e.g., a national bank or state member bank). In 

practice, this authority is exercised on a limited basis and typically in cooperation with 

the federal agency that regulates the bank being examined. A typical scenario for a special 

examination, often referred to as a “backup examination,” involves a problem bank or 

other bank posing unusual risks where the FDIC requests, and is granted, some level of 

participation in an examination conducted by the Office of Comptroller of the Currency 

or by the Federal Reserve (or, before July 2010, by the OTS). Although the practices of 

off-site analysis did not substantially change before or at the beginning of the crisis, the 

FDIC’s exercise of special examination authority became a more important part of the risk 

assessment process as the proportion of insured assets held by institutions not directly 

supervised by the FDIC continued to grow. 

In determining when to exercise its special examination authority, the Corporation was 

helped by reviews it carried out under a program it had maintained since the late 1980s and 

still maintains—its Large Insured Depository Institution (LIDI) program, devoted to the 

monitoring and risk assessment of insured institutions with assets exceeding $10 billion.33 

On the basis of reviews of financial data and examination reports as well as contacts with 

the primary federal regulator (PFR), the LIDI program generates a brief quarterly report on 

each of these large institutions, highlighting risks, trends, and areas of supervisory focus. 

These reviews are shared with the PFRs for consideration in their examination planning. 

Since 1950, when Congress granted the FDIC authority to perform special examinations, 

the FDIC Board of Directors has adopted various policies governing the use of these 

examinations. For example, in 1983 the Board authorized a Cooperative Examination 

Program under which FDIC personnel would automatically be invited to participate 

in examinations of national banks rated CAMEL 4 or 5 and of selected other banks (as 

mentioned in footnote 12, the “S” component of CAMELS was added in 1996). That 

policy was rescinded in 1993 when the FDIC Board adopted a policy requiring all 

recommendations for a special examination to go to the Board for approval. 

In 1995, the FDIC Board delegated authority to the then Division of Supervision to 

participate in special examination activities when the PFR invited FDIC participation, or 

32 This information can be found at www.fdic.gov under the “industry analysis/historical statistics on banking/ 

failures and assistance transactions” tabs. 

33 As of June, 30, 2017, there were 121 FDIC-insured depository institutions that had assets of $10 billion or 

more. 
116 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

when an institution had a CAMEL composite rating of 4 or 5, or when there were material 

deteriorating conditions not reflected in the current CAMEL rating and the PFR did not 

object to the FDIC’s participation.34 

In the last few years of the 1990s, three institutions failed that imposed extraordinarily 

high loss rates on the DIF as a percentage of their asset size: BestBank in Boulder, Colorado 

(in which the FDIC’s loss amounted to 69 percent of the institution’s assets at failure); 

First National Bank of Keystone in Keystone, West Virginia (51 percent loss rate); and 

Pacific Thrift and Loan Company in Woodland Hills, California (61 percent loss rate). 

In the case of Keystone in particular, then FDIC Chairman Donna Tanoue observed that, 

although the outcome might not have been affected, coordination between the Office of 

the Comptroller of the Currency and the FDIC was not optimal.35 In commenting on the 

2001 failure of Superior Bank, FSB in Hinsdale, Illinois, John Reich, an FDIC Director 

at the time, stated, “The FDIC needs full access to all banks and thrifts. ... The FDIC 

Board’s own complicated procedures inhibit our access when another regulator denies 

our participation. We ought to fix this.”36 

In 2002, the federal banking agencies entered into an interagency agreement, 

“Coordination of Expanded Supervisory Information Sharing and Special Examinations.” 

This agreement identified the types of institutions for which the FDIC could conduct special 

examinations: (1) institutions that represented a heightened risk to the deposit insurance 

funds, as agreed on a case-by-case basis; (2) institutions with a composite CAMELS rating 

of 3, 4, or 5; or (3) institutions that were undercapitalized under the Prompt Corrective 

Action guidelines.37 The agreement also addressed coordination between the other agencies’ 

examiners and a cadre of FDIC “dedicated examiners.” The FDIC’s dedicated examiner 

program was an effort to improve the FDIC’s understanding and awareness of risks at the 

largest insured banks. For each of the eight largest financial institutions in the nation, the 

program provided for a single FDIC examiner to work on-site with the primary federal 

regulator’s examination team under parameters described in the 2002 agreement. Pursuant 

34 In 2005, recognizing the growing size and complexity of institutions and the implication for the DIF, the 

FDIC Board further delegated authority to the FDIC Chairman to determine when a special examination 

was warranted. 

35 Hearings on Recent Bank Failures and Regulatory Initiatives Before the House Committee on Banking and 

Financial Services, 106th Cong. (Feb. 8, 2000) (statement of Donna Tanoue, Chairman, Federal Deposit 

Insurance Corporation), http://archives.financialservices.house.gov/banking/2800tan.shtml. 

36 John Reich, “The Lessons of Superior,” August 21, 2001, https://www.fdic.gov/news/news/speeches/ 

archives/2001/sp28aug01.html. FDIC staff may request participation on an examination of a bank regulated 

by another banking agency, but if that agency denies the request, staff would need to obtain explicit approval 

from the FDIC Board of Directors in order to conduct such examination activities. 

37 The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) amended the Federal 

Deposit Insurance Act to require the appropriate federal banking agency to take prompt corrective action to 

resolve the problems of insured depository institutions, and provides a framework of supervisory actions for 

insured institutions that are less than well capitalized. 
CHAPTER 4: Bank Supervision 117 

to the parameters of the dedicated examiner program, FDIC dedicated examiners worked 

on-site with the primary federal regulators of Citigroup, Wachovia, Bank of America, Bank 

One, FleetBoston Financial, JP Morgan Chase, Wells Fargo, and Washington Mutual. 

The dedicated examiners served as the FDIC’s primary point of contact with PFR 

supervisory personnel. Under the 2002 agreement, if the dedicated examiner determined 

it appropriate to participate in an examination to evaluate the risk to the DIF of a particular 

banking activity but the PFR’s staff disagreed, the dispute was to be settled by the heads 

of supervision of the two agencies, and if the dispute remained unresolved, then by the 

principals of the two agencies. 

In addition to its strengths, the dedicated examiner program presented opportunities 

for improvement. Its importance was that it provided the FDIC with a better window into 

the risks posed by these large institutions, thereby enhancing the Corporation’s efforts to 

identify, monitor, and assess the risks to the DIF posed by large, complex banks that are 

not supervised by the FDIC. However, the FDIC was not always able to secure prompt 

permission to participate in examinations of these banks. To gain access to an institution, 

the FDIC was required to show that the institution posed a high level of risk to the DIF— 

but it needed this access to assess the level of risk.38 A few examples drawn from the FDIC’s 

experience with large troubled institutions will help clarify these points. 

On July 11, 2008, the Office of Thrift Supervision appointed the FDIC as conservator 

of IndyMac Bank FSB, a West Coast thrift institution with $32 billion in assets. Measured 

by its estimated cost to the DIF, IndyMac was and remains the most expensive bank failure 

in the FDIC’s history. Before mid-2007, however, the FDIC’s regular risk monitoring 

of IndyMac had not identified more than a normal, or at worst a somewhat elevated, 

level of risk to the DIF, consistent with the favorable examination ratings assigned by 

the institution’s PFR, the Office of Thrift Supervision. Only starting in August 2007, 

when Countrywide Bank—a large thrift that, like IndyMac, had specialized in alternative 

mortgage lending—began experiencing liquidity problems, did the FDIC’s supervisory 

concerns with IndyMac and other thrifts that had concentrations in subprime and other 

nontraditional mortgage lending increase significantly. The FDIC requested and gained 

a presence in the on-site examination of IndyMac and began evaluating that bank’s 

viability. As a result of these efforts, the FDIC was better prepared for the resolution of 

IndyMac when the institution failed. 

Another large thrift that failed in the second half of 2008 was Washington Mutual Bank 

(WaMu). With assets of $307 billion, WaMu—which failed on September 25, 2008—was 

the largest bank failure by asset size in the FDIC’s history.39 In 2005, WaMu management 

38 For further discussion, see U.S. Department of the Treasury and Federal Deposit Insurance Corporation, 

Offices of Inspector General, “Evaluation of Federal Regulatory Oversight of Washington Mutual Bank,” 

Report EVAL-10-002 (April 2010), 52–53, https://www.fdicig.gov/sites/default/files/publications/10­

002EV.pdf. 

39 WaMu’s failure did not cost the DIF anything because the thrift was acquired by JPMorgan Chase. 
118 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

had made a decision to shift its business strategy away from originating traditional fixedrate and single-family residential loans that conformed to the criteria for purchase by 

the government-sponsored enterprises Fannie Mae and Freddie Mac, and toward riskier 

nontraditional loan products and subprime loans. The FDIC had a dedicated examiner 

at WaMu and in 2006, 2007, and 2008 made a number of staff-level requests to the 

institution’s PFR, the Office of Thrift Supervision, to be allowed to increase its on-site 

presence. The OTS denied these requests because it believed that the FDIC did not have the 

requisite need for access according to the terms of the interagency agreement, and it also 

believed that the FDIC could rely on the work performed by the OTS. The OTS assigned 

favorable examination ratings to WaMu through 2007 and into 2008, and the FDIC did 

not contest these ratings. Starting in the spring of 2008, with the agreement of the OTS, 

the FDIC increased its on-site presence at WaMu and argued that the institution should be 

downgraded to problem-bank status.40 

After WaMu’s failure, the Office of Inspector General (OIG) at the Department of the 

Treasury (Treasury) and the OIG at the FDIC recommended that the FDIC Chairman, in 

consultation with the FDIC Board of Directors, revisit the interagency agreement governing 

access to information and backup examinations for large depository institutions, to ensure 

not only that the agreement provided the FDIC with sufficient access to the information 

necessary for assessing an institution’s risk to the DIF but also that it covered all large 

depository institutions. The interagency agreement was modified in July 2010. 

In the days following the WaMu failure, Wachovia Corporation experienced a liquidity 

crisis and was subsequently acquired by Wells Fargo. The FDIC had had a dedicated examiner 

at Wachovia. As described more fully in chapter 3, in early 2008 the FDIC downgraded its 

internal outlook rating (LIDI rating) for Wachovia Bank, the flagship depository institution 

subsidiary of Wachovia, indicating that the FDIC considered the institution to have an 

elevated risk profile and was likely to deteriorate to a “3” CAMELS composite rating 

within 12 months. In August 2008, Wachovia’s PFR, the OCC, downgraded the institution’s 

CAMELS rating to a composite “3.” However, as late as the week before Wachovia 

Corporation’s liquidity crisis, the OCC had not viewed Wachovia Bank as a problem bank, 

and the FDIC had not raised objections to the OCC’s risk assessment. The discrepancy 

between Wachovia’s precarious condition and regulators’ views of the institution provides 

a good example of both the difficulty, and the importance, of evaluating the risks at large 

banks. At any rate, the need to address the liquidity crisis quickly came to a head, and 

FDIC supervision staff provided analytical support to the FDIC’s Board of Directors about 

alternative courses of action potentially available to address the problems at this institution. 

Staff ’s ability to provide the needed support was enhanced by the information gained from 

the dedicated examiner program and the LIDI program. 

40 The material in this paragraph is drawn from the Offices of Inspector General, U.S. Department of the 

Treasury and FDIC, “Evaluation.” 
CHAPTER 4: Bank Supervision 119 

Similar comments apply to the staff assistance provided to the FDIC Board of Directors 

in the cases of two other very large and troubled banks, Citigroup and Bank of America 

Corporation, about which the Board would likewise have to make a decision. (For details 

on the cases of all three banks—Wachovia, Citigroup, and Bank of America Corporation— 

see chapter 3.) At each of these institutions, the FDIC had a dedicated examiner, and the 

members of the Board relied on supervisory staff to help assess potential loss exposure to 

the FDIC under various options that the Board needed to consider for dealing with these 

institutions. Staff ’s ability to provide analytical support to the decisionmaking process 

depended on a baseline of knowledge about these institutions gained from the dedicated 

examiner program and the LIDI program. 

The Crisis: Characteristics of Failed and Problem Banks 

The Case-Shiller index of home prices peaked in July 2006 and then declined steadily for 

almost six years, losing 27 percent of its value before bottoming out in February 2012. For 

banks and their borrowers, the effects of this steady decline in housing prices and of the 

recession that began in December 2007 were gradual at first, but quickly grew more severe. 

As depicted in Table 4.1, the number of problem banks (which stood at only 50 at year-end 

2006) reached 252 by year-end 2008, 702 by year-end 2009, and 884 by year-end 2010. The 

number of bank failures increased rapidly as well, going from 25 in 2008 to 140 in 2009 to 

157 in 2010, before declining to 92 in 2011 and dropping every year through 2016. 

Table 4.1. Number of Problem Banks and Failures, 2007–Q1 2017 

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q1 2017 

Total IDIs 8,534 8,305 8,012 7,658 7,357 7,083 6,812 6,509 6,182 5,913 5,856 

Problem Banks 76 252 702 884 813 651 467 291 183 123 112 

Failures 3 25 140 157 92 51 24 18 8 5 3 

Cumulative 3 28 168 325 417 468 492 510 518 523 526 

Failures 

Note: “IDI” stands for “Insured Depository Institution.” 

Most banks that failed or became problem banks did so because of large concentrations, 

relative to their capital, of poorly underwritten and administered commercial real estate 

loans and (especially) ADC loans. During the pre-crisis years, many of these banks had 

exhibited financial metrics that often indicate a higher appetite for risk. These metrics 

include high concentrations of ADC loans, rapid asset growth, and relatively greater use of 
120 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

wholesale funding sources as compared with other banks.41 In addition, banks’ choice of 

capital structure mattered: banks that operated with lower levels of capital during the runup to the crisis failed more often.42 

Figure 4.2 addresses the experience of banks during the crisis by percentile ADC loan 

concentration range. For this figure, the ratio of ADC loans to capital for each bank as of 

December 31, 2006, was calculated, and the banks were grouped into percentiles based on 

this ratio. This set of banks was then restricted to those with a CAMELS rating of 1 or 2 as 

of December 31, 2006. For each percentile group, the proportions of banks that, over the 

subsequent five years, either failed (red) or were downgraded to a CAMELS composite 

rating of 3, 4, or 5 (various shadings) are depicted by the vertical bars. The figure indicates 

that the more concentrated a bank was in ADC lending, the more likely it was to fail or 

be downgraded. Although ADC loan concentrations alone do not necessarily present a 

problem if the loans are well underwritten, all other things being equal, a bank with a 

higher ADC loan concentration will be more affected by a real estate downturn. 

Figure 4.2. Downgrades of 1- and 2-Rated Banks: Ratio of ADC Loans to Capital 

Percent 

80 Downgrade to 75.3 

70 

60 

50 

40 

30 

20 

10 

0 3.0 5.0 2.8 7.7 4.3 

6.8 6.3 

9.6 

19.6 

22.5 

22.9 

22.3 10.1 

14.9 

3.0 1.8 2.2 3.7 4.6 

10.3 

16.9 

17.2 

12.9 13.4 

16.5 16.3 

29.5 

28.4 

20.9 

17.6 16.4 

20.3 22.4 

26.0 

34.0 

39.8 

51.0 

3 4 5 Failure 

63.1 

10 20 30 40 50 60 70 80 90 100 

Ratio of ADC Loans to Total Risk-Based Capital by Percentile 

Figure 4.3 presents the failure and downgrade experience of banks by percentile asset 

growth range. The percentile rank of each bank’s one-year merger-adjusted asset growth 

41 The term ”wholesale funding” is a generic and imprecise term intended to refer to those liabilities of a bank 

that are not stable core deposits. In this chapter, specific funding categories that are deemed “wholesale” are 

noted in the descriptive text associated with individual figures. 

42 The discussion in this chapter is consistent with the results of the FDIC’s statistical analysis of factors 

associated with bank failures, described in FDIC, “Assessments—Notice of Proposed Rulemaking and 

Request for Comment,” 81 Fed. Reg. 74580–74588 (Feb. 4, 2016), https://www.gpo.gov/fdsys/pkg/FR-2016­

02-04/pdf/2016-01448.pdf. 
CHAPTER 4: Bank Supervision 121 

as of year-end 2006 was computed and compared with the subsequent five-year failure 

and downgrade experience, as was done for Figure 4.2. Figure 4.3 indicates that failures 

and downgrades were concentrated among institutions that were growing relatively 

faster. This is consistent with the observation that fast growth may sometimes be the 

result of lowered underwriting standards and more-aggressive competition for new 

business. Banks that make more lending concessions to attract borrowers during a real 

estate expansion are more likely to run into trouble during the downturn. 

Figure 4.3. Downgrades of 1- and 2-Rated Banks: Asset Growth 

Percent 

70 

60 

50 

40 

30 

20 

10 

0 

Downgrade to 64.2 

3 4 5 Failure 

57.0 

43.6 

35.6 

31.4 

27.9 28.2 27.2 26.8 

24.7 

17.4 

17 18.7 18.0 .3 19.7 16.1 

6.4 

5.3 6.5 3.4 6.6 6.2 4.1 

2.9 

21.2 

6.8 

4.4 

3.3 

23.4 

10.7 

4.6 

5.0 

27.0 

12.3 

9.5 

8.3 

23.9 

12.8 

11.0 

16.4 

10 20 30 40 50 60 70 80 90 100 

One-Year Merger-Adjusted Asset Growth Rate by Percentile 

Figure 4.4 presents the failure and downgrade experience of banks by reliance on 

wholesale funding, defined for this figure as the sum of brokered deposits, federal funds 

purchased, securities sold under repurchase agreements, and other borrowed money. 

The figure takes the approach that was taken for the two preceding figures: year-end 

2006 ratios are calculated and compared with the failure and downgrade experience 

for the subsequent five years. Generally speaking, failures and downgrades were more 

concentrated among banks that made relatively greater use of wholesale funding sources. 

Although use of wholesale funding sources within a sound liquidity management 

program is not in itself a risky practice, significant reliance on wholesale funds may 

reflect the decisions an institution has made to grow its business more aggressively. 

At such institutions, the loan mix may tend to be generally more risky. On the liability 

side, if the institution comes under stress, wholesale counterparties may be more apt 

to withdraw funding or demand additional collateral. Additionally, if the institution 

becomes less than well capitalized, it cannot accept brokered deposits without a waiver 
122 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

from the FDIC and is subject to restrictions on the interest rates it can pay on all its 

deposits. If the institution becomes less than adequately capitalized, it cannot accept 

brokered deposits at all.43 

Figure 4.4. Downgrades of 1- and 2-Rated Banks: Ratio of Wholesale Funding to 

Total Assets 

Percent 

70 

60 

50 

40 

30 

20 

10 

0 

Downgrade to 

3 4 5 Failure 59.5 

49.9 

44.0 24.3 

33.5 

36.8 38.3 

23.1 

25.6 

16.7 

27.1 

17.8 

29.0 

17.1 

20.5 

22.6 22.1 

23.1 

9.0 

12.3 

14.2 

9.3 

5.0 

2.1 

3.3 

4.1 

5.6 

4.1 

6.9 

2.9 

3.1 

6.9 

4.2 

3.1 

7.7 

4.5 

4.0 

5.7 

6.2 

7.1 

7.4 

11.8 

10* 20 30 40 50 60 70 80 90 100 

Wholesale Funding to Total Assets by Percentile 

* The 10th percentile bar does not exist because 2,090 banks had zero Wholesale Funding. Since there is no differentiation 


among these banks in their use of Wholesale Funding, they are all aggregated under the 20th pctl.
 

Note: “Wholesale Funding” includes federal funds purchased and securities sold under agreements to repurchase, other 


borrowed money, and brokered deposits.
 

Figure 4.5 depicts the failure experience of FDIC-insured banks during the crisis using 

their equity-to-asset ratios as of year-end 2003; for example, “equity capital below 8%” 

in the figure refers to banks with an equity-to-asset ratio of less than 8 percent. This 

calculation date is well before the onset of the crisis and is in the midst of the housing 

price boom. Capital ratios as of a date well before the start of this crisis are more likely 

to reflect institutions’ strategic priorities regarding safety, return on equity, and growth 

and are less likely to reflect factors such as loan write-downs or other operating losses. As 

indicated in the figure, banks that chose to operate during the midst of the housing boom 

with lower equity-to-asset ratios were more likely to fail during the crisis. These results 

probably reflect two factors. First, operating with lower capital reduces an institution’s 

ability to absorb losses and therefore (all else being equal) makes the institution’s failure 

during a downturn more likely. Second, operating with lower capital may reflect more 

43 Section 29 of the Federal Deposit Insurance Act describes the restrictions—applicable to banks that are 

less than “well capitalized” for purposes of prompt corrective action—on the use of brokered deposits and 

interest paid on deposits. Part 337.6 of the FDIC’s regulations implements the statutory provisions. 
CHAPTER 4: Bank Supervision 123 

emphasis by bank management on achieving aggressive return-on-equity goals, and this 

emphasis may reflect management’s higher appetite for risk more generally. 

Figure 4.5. Cumulative Failure Percentage by Equity-to-Asset Ratio, 2003–2016 

Failure Percentage 

8 Equity Capital below 8%
 

Equity Capital 8-9%
 7 

6 

5 

4 

3 

2 

1 

0 

Equity Capital 9-10% 

Equity Capital greater than 10% 

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Finally, the failure rate of newer institutions during the crisis was substantially higher 

than that of more-established institutions. Among institutions chartered between January 

1, 2000, and December 31, 2006, 15 percent have since failed. In contrast, among institutions 

chartered before 2000, 5 percent have since failed. The tendency of more recently chartered 

institutions to fail more often than established institutions was observed during the 1980s 

crisis as well.44 Under any circumstances, newly chartered institutions tend to operate with 

losses during their early years while they build up their business. In addition, a number of 

the failures of newer institutions during the recent crisis involved institutions entering into 

activities that were significantly riskier than those contemplated in the business plans that 

were the basis of their approved application for deposit insurance.45 

It is important to note that though the indicators described above—ADC concentrations, 

rapid growth, dependence on high levels of wholesale funding, lower capital, and the age 

44 FDIC, “Banking Problems in the Southwest,” in History of the Eighties: Lessons for the Future (1997), 1:313– 

14, https://www.fdic.gov/bank/historical/history/291_336.pdf. 

45 Analysis of de novo bank performance and a survey of relevant literature is contained in Yan Lee 

and Chiwon Yom, “The Entry, Performance, and Risk Profile of De Novo Banks,” FDIC Center for 

Financial Research Working Paper 2016-03, April 2016, https://www.fdic.gov/bank/analytical/cfr/2016/ 

wp2016/2016-03.pdf. 
124 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

of the bank—are highly correlated with bank failures and problem-bank status, they do 

not paint a complete picture. Many banks that had heightened values of the first four 

indicators or were more recently chartered did not fail, and some banks that failed were 

established banks and did not have heightened values of the four indicators. 

The reason for the only partial correlation between the indicators and failure or 

problem-bank status is that the viability of a bank and its resilience during a period of 

economic stress depend on important bank-specific factors that cannot be evaluated 

adequately using published financial reports. Among these factors are the quality of loan 

underwriting and credit administration, risk limits, and internal controls, all of which are 

specific aspects of bank governance. Failures of governance can result in excessive risk in 

the lending or investment functions and can also increase a bank’s susceptibility to fraud 

and insider abuse. Material Loss Reviews (MLRs) prepared by the FDIC OIG for the six 

FDIC-supervised institutions with assets exceeding $5 billion that failed during and just 

after the crisis all reported significant deficiencies in their risk management practices, and 

five of the six MLRs referenced identified or suspected irregularities (possibly indicative 

of fraud or insider abuse) that contributed to the problems these institutions had faced.46 

Governance issues are equally important for smaller banks. MLRs for smaller banks 

consistently described how the managements of failing banks did not implement adequate 

controls over their institutions’ risk profiles. A recent paper on fraud detection in banking 

finds that bank supervisors detected material insider abuse or internal fraud among a 

significant minority of banks that failed between 1989 and 2015.47 

Viewing the importance of governance in a more positive light, the FDIC’s experience 

has been that strong governance is the most important determinant of a bank’s long-term 

viability. A study by the FDIC OIG of banks that remained in satisfactory condition in 

2011 despite high ADC concentrations reinforces that experience.48 As discussed in the 

46 The six MLRs, prepared by the FDIC Office of Inspector General and available at www.fdicig.gov, are (1) 

“Material Loss Review of Franklin Bank, S.S.B, Houston, Texas,” Report AUD-09-014 July 2009, https:// 

www.nclc.org/images/pdf/foreclosure_mortgage/lender_failed_banks/franklin-bank-oig.pdf; (2) “Material 

Loss Review of Colonial Bank, Montgomery, Alabama,” Report MLR-10-031, April 2010, https://www. 

fdicig.gov/sites/default/files/publications/10-031.pdf; (3) “Material Loss Review of United Commercial 

Bank, San Francisco, California,” Report MLR-10-043, July 2010, https://www.fdicig.gov/sites/default/files/ 

publications/10-043.pdf; (4) “Material Loss Review of Westernbank Puerto Rico, Mayaguez, Puerto Rico,” 

Report MLR-11-007, December 2010, https://www.fdicig.gov/sites/default/files/publications/11-007.pdf; 

(5) “Material Loss Review of R-G Premier Bank of Puerto Rico, Hato Rey, Puerto Rico,” Report MLR-11­

009, December 2010, https://www.fdicig.gov/sites/default/files/publications/11-009.pdf; and (6) “Material 

Loss Review of Doral Bank, San Juan, Puerto Rico,” Report AUD-15-007, September 2015, https://www. 

fdicig.gov/sites/default/files/publications/15-007AUD.pdf. 

47 John O’Keefe and Chiwon Yom, “Offsite Detection of Insider Abuse and Bank Fraud among U.S. Failed 

Banks 1989–2015,” FDIC Center for Financial Research Working Paper 2017-06, October 2017, https:// 

www.fdic.gov/bank/analytical/cfr/2017/wp2017/cfr-wp2017-06.pdf. 

48 FDIC Office of the Inspector General, “Acquisition, Development, and Construction Loan Concentration 

Study,” Report EVAL-13-001, October 2012, https://www.fdicig.gov/sites/default/files/publications/13­

001EV.pdf. 
CHAPTER 4: Bank Supervision 125 

section titled “The Aftermath of the Crisis: Lessons Learned for Supervision,” the OIG 

study affirms that banks with effective governance were more likely to achieve a positive 

outcome during the crisis. 

The Crisis: Supervisory Strategies 

The supervisory strategies the FDIC used in the crisis were intended to identify and 

respond appropriately to the risks at individual banks and groups of banks. An immediate 

and important challenge was to evaluate banks’ risk profiles and ensure appropriate 

examination ratings. Given the rapid deterioration of a large number of institutions, this 

was a significant task. 

Once risks were identified, supervisory responses varied depending on the condition 

of each bank. Ideally, before adverse financial conditions occur, supervisors can identify 

and obtain corrections of the weaknesses in banks’ policies and procedures that have 

a realistic potential to cause financial problems. The goal of this forward-looking 

model is to recognize problems early enough for corrective measures to be taken and 

for banks to be returned to health. In fact (to anticipate some of the discussion in this 

section), a number of banks received only an informal enforcement action during the 

crisis, corrected their problems, and returned to health. At other banks, however, the 

crisis resulted in severe financial deterioration and imminent danger of failure. In those 

situations, supervisory strategies focused on close monitoring of troubled institutions 

to promote conservation of capital, to limit the incentives to take excessive risks, and 

ultimately to limit losses to the DIF. As described in this section, the FDIC used a range 

of supervisory strategies to meet these various objectives. 

The Examination Program 

The effects of the banking crisis on the FDIC’s bank examination and supervision 

activities escalated quickly. From the beginning of 2008 through March 31, 2017, nearly 

1,800 insured banks were in problem-bank status at some point; the period 2009–2010, 

in particular, was a period of exponential growth in the number of problem banks. 

Given the examination and supervision resources available at that time, handling the 

dramatic increase in the number of troubled banks required changes to the normal 

supervisory routine. With the quickly deteriorating conditions facing the U.S. banking 

industry, waiting what could be as long as 24 to 36 months for the next scheduled FDIC 

examination was not a feasible supervisory strategy. 

The FDIC, however, was not staffed for a crisis of this speed and magnitude and had 

to take several contingency actions to address the sudden deterioration in the industry. 

Examples included applying to the federal Office of Personnel Management (OPM) 

for authority to repurchase employees’ annual leave; sending examiners from regions 
126 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

experiencing less stress to help regions experiencing more stress; spending less time on 

specialty examinations49 to free more examiner resources for other safety-and-soundness 

examination work; and reducing the portion of examiners’ time spent in training and 

temporary assignments so that they could spend more time examining banks. 

Another way the FDIC addressed the resource challenge was by supplementing the 

examination force with employees who were hired for a time-limited term. Many of 

these term employees had substantial experience in bank supervision. By 2010, 494 term 

employees hired to assist with safety-and-soundness examinations were on board at the 

FDIC. More than 75 percent of them were loan review specialists; others were specialists in 

investigations, information technology, and the Bank Secrecy Act/Anti-Money Laundering. 

Some of the term employees were retired FDIC employees, who were rehired under a 

special authority granted by the federal Office of Personnel Management. Some of these 

rehired individuals were able to pass along the benefit of their extensive examination and 

bank supervision experience by helping with the training of pre-commissioned examiners. 

One of the effects of the banking industry’s rapid deterioration, especially in conjunction 

with relatively reduced examiner staffing entering the crisis, was that there was a lag in the 

adjustment of examination ratings to reflect new industry conditions. In addition to the 

staffing measures just described, the FDIC used a variety of examination techniques to 

address the lag in rating changes. For example, the volumes of noncurrent loans self-reported 

by some banks on their quarterly Call Reports were at levels historically characteristic of 

problem banks. Other banks self-reported strong asset quality metrics despite balancesheet characteristics similar to those of banks on the problem-bank list (characteristics 

such as significant concentrations of ADC loans). Such banks were often handled by a 

visitation focused on asset quality, unless a safety-and-soundness examination was already 

scheduled in the near term. These visitations frequently resulted in rating downgrades and 

the establishment of corrective action plans. As a result of such contingency measures, by 

the third quarter of 2009, ratings overall more closely reflected the condition of the industry. 

For the FDIC as insurer, accurate CAMELS ratings are important, for they are key inputs 

to the FDIC’s statutorily mandated risk-based deposit insurance system (see chapter 5). 

The ratings affect the distribution of assessments across insured banks, and the FDIC 

historically has attempted to ensure that this distribution, to the extent practicable, reflects 

the risk of loss to the DIF. From a bank supervision perspective, accurate CAMELS ratings 

are important to the timely identification, mitigation, and remediation of problems at 

troubled banks. The CAMELS rating, and the associated formal or informal enforcement 

actions in the case of troubled or poorly rated banks, are extremely important in that they 

clearly communicate to a troubled bank’s board of directors the actions needed to restore 

or maintain the bank’s health. 

49 “Specialty examinations” include examinations of bank trust departments, examinations of banks’ 

information technology systems, and examinations to ensure compliance with the Bank Secrecy Act. 
CHAPTER 4: Bank Supervision 127 

Enforcement Actions 

As a rule, formal FDIC enforcement actions are closely associated with a CAMELS 

composite rating of 4 or 5, while an informal FDIC action is most often associated with a 

CAMELS rating of 3. Formal actions are publicly disclosed and can be enforced in federal 

court. Additionally, civil money penalties (CMPs) can be assessed for noncompliance 

with a formal action. Informal actions are non-public agreements between the bank and 

the FDIC (or other banking agency) to address specific risk management issues or other 

issues, and are not enforceable. 

The types of formal actions available to the FDIC include termination of insurance; 

cease-and-desist orders and consent orders; prohibition, removal, or suspension actions; 

CMPs; and prompt corrective action directives. During the crisis the specific subject 

matter addressed by formal enforcement actions varied, depending on the facts and 

circumstances at each bank, but often included orders to cease unsound banking 

practices, to increase capital or reduce the volume of problem loans or both, to cease 

dividend payments or inter-affiliate transactions, to replace management, or to curtail 

asset growth. 

For problem banks where problems were particularly severe, some orders directed 

the banks’ boards to either raise capital or prepare to sell, merge, or liquidate the bank. 

These directives were effective in making banks’ boards understand the severity of their 

problems. They forced reluctant boards to take actions the result of which would often 

be that those board members lost control of the banks. In these cases, however, raising 

capital or proceeding to sell, merge, or liquidate was in the best interest of the bank, its 

shareholders, and the DIF. 

Informal actions available to the FDIC include bank board resolutions and memoranda 

of understanding (MOU). They also include safety-and-soundness plans pursuant 

to Section 39(e) of the FDI Act when an institution does not operate in conformance 

with the safety-and-soundness operating standards identified in Section 39. A typical 

example of an informal action would be an MOU signed by a bank’s board of directors 

committing to address shortcomings in loan underwriting or in other aspects of credit 

administration, to raise capital, to reduce levels of nonperforming loans, or to address 

some other shortcoming depending on the specific facts. 

Figure 4.6 depicts the number of formal safety-and-soundness enforcement actions 

issued by the FDIC from 2000 through 2016.50 As the crisis intensified, the number 

increased sharply, going from 101 in 2007 to 174 in 2008, to 397 in 2009, and to 511 in 

50 Actions include those taken pursuant to Section 8(b) of the Federal Deposit Insurance Act, which addresses 

the federal banking agencies’ authority to order banks or affiliated parties to cease and desist from certain 

activities; those taken pursuant to Section 8(e) of that act, which addresses the banking agencies’ authority 

to remove bank-affiliated individuals from office or prohibit them from further participation in the business 

of banking; and civil money penalties. Actions reported in Figure 4.6 are only those with a safety-andsoundness basis issued from January 1, 2000, through December 31, 2016. Not included are actions with a 

Community Reinvestment Act or compliance basis or actions with a status of “withdrawn” or “proposed.” 
128 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

2010. Since the crisis, the number has dropped substantially: the numbers of such actions 

issued in 2015 and 2016 were close to the levels that generally prevailed before the crisis. 

Figure 4.6. Number of Formal Safety-and-Soundness Enforcement Actions Issued by 

FDIC, 2000–2016 

600 

511 

500 

397 

400 

309 

300 285 

208 

191 200 174 159 150 152 153 

135 134 

105 101 

100 84 

62 

0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

For enforcement actions in general during the crisis, the formality of actions and 

the specific provisions depended on the unique circumstances of individual banks and 

were adjusted over time as the condition of an institution changed. Outcomes included 

actions being withdrawn after successful resolution of the problems, transition from 

a formal action to an informal action in response to observed progress in addressing 

issues, transition from an informal action to a formal action if problems were not 

resolved successfully, voluntary cessations of bank operations with no loss to the DIF,51 

and bank failures. As noted in a subsequent section (“Strategies to Insulate Banks from 

Problems at BHCs”), outcomes also sometimes included the bankruptcy of a bank’s 

parent bank holding company while the bank itself survived. 

51 Some troubled banks voluntarily wound down their activities by selling assets, paying off depositors and 

creditors, and ultimately ceasing their operations with no loss to the FDIC; this process is sometimes referred 

to as self-liquidation. 
CHAPTER 4: Bank Supervision 129 

Examination Letters 

In late 2008, supervision staff observed that some institutions were increasing their risk 

profile between the close of an examination and the issuance of a related enforcement action. 

In response, in early 2009, FDIC began issuing letters to boards of directors of troubled 

institutions at the close of an examination to communicate the FDIC’s expectations for the 

period of time until the issuance of an enforcement action. These documents were referred 

to as examination letters. Examination letters notified a bank’s board of directors that the 

institution’s composite rating was tentatively downgraded, and conveyed the expectation 

that management stabilize the institution’s risk profile and strengthen its financial 

condition. The examination letters also notified the board that actions taken to materially 

expand the institution’s balance sheet or risk profile would be inconsistent with supervisory 

expectations, and that a non-objection from the regional director had to be obtained 

before the bank engaged in any transactions that would materially change the institution’s 

balance sheet composition, such as significantly increasing total assets or volatile funding 

sources. Boards were informed that failure to ensure compliance with the requirements 

of the examination letter would be unfavorably viewed by the FDIC and might constitute 

an unsafe and unsound practice or condition. These letters served to limit any incentive a 

troubled institution might have to take excessive risks. 

Supervision of New Institutions 

As noted above, new institutions failed at a substantially higher rate during the crisis 

than did more-established institutions. Many of those failures occurred during the 

fourth through seventh years of operation. Moreover, a number of the newly chartered 

institutions that failed deviated significantly from the business plans on which the 

approval of their application for deposit insurance had been based, and the deviation 

led to increased risk and financial problems when the accompanying controls and 

risk management practices were inadequate. In August 2009, the FDIC responded by 

extending from three years to seven years the period during which newly insured state 

nonmember banks were subject to heightened oversight, including review and approval 

of their business plans and annual examinations.52 Given the ongoing improvement in 

post-crisis industry performance, in April 2016 the FDIC rescinded the extension to 

seven years as the period of heightened oversight, returning the period to three years. 

Strategies to Insulate Banks from Problems at BHCs 

For most of the FDIC’s history, the Corporation’s statutory responsibilities centered 

on insured banks: insuring their deposits, acting as receiver in the event of failure, and 

serving as the primary federal regulator for a subset of insured banks, with backup 

examination 

52 FDIC, “Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions,” 

Financial Institution Letter, FIL-50-2009, August 28, 2009. 
130 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

authority for all insured banks. As a result of the crisis, however, the FDIC’s formal, 

programmatic focus expanded beyond the boundaries of the insured bank. In 2008, the 

FDIC temporarily guaranteed certain liabilities issued by bank holding companies (see 

chapter 2). And in 2010, Congress conferred certain resolution responsibilities on the 

FDIC with respect to bank holding companies and other financial firms whose failure 

could pose systemic concerns.53 

Yet even within the scope of the FDIC’s supervisory responsibilities for insured 

banks, the relationship between a bank and its holding company was (and remains) 

an important consideration. A concern is that nonbank entities that own or control a 

bank could enter into abusive arrangements with the bank that benefit themselves at 

the bank’s expense. Examples could include excessive dividends or other fund transfers 

from the bank to its parent, sales of assets from the bank to an affiliate or vice versa on 

terms disadvantageous to the bank, loans by the bank to fund purchases of products 

sold by affiliates, and so forth. An important aspect of bank supervision is guarding 

against the misuse of the bank by its affiliates. Areas of focus include, for example, 

examining banks for compliance with statutory inter-affiliate transaction limits and 

with insider lending rules. 

Bank holding companies are supervised by the Federal Reserve and are subject to 

the principle that bank holding companies should serve as a source of strength for their 

subsidiary banks. However, when the subsidiary (the underlying financial institution) 

is not a bank for the purposes of the Bank Holding Company Act of 1956,54 the parent 

company is not a bank holding company subject to consolidated supervision by the 

Federal Reserve. In these cases, the FDIC generally requires the parent company to enter 

into a Capital and Liquidity Maintenance Agreement (CALMA), which is a written 

agreement, authorized under Section 8 of the Federal Deposit Insurance Act, requiring 

the holding company to inject capital into the insured bank as necessary to ensure that 

the bank maintains adequate capital. These agreements essentially impose the sourceof-strength principle. 

The 2008–2013 crisis showed that in times of economic stress, banks’ access to insured 

deposits often makes them the financially strongest entities within a holding company 

structure. At such times, statutory limits on inter-affiliate transactions are particularly 

important in preventing transactions that may benefit holding company affiliates at the 

expense of the bank. Specifically, Sections 23A and 23B of the Federal Reserve Act are 

designed to protect insured depository institutions from sustaining losses on transactions 

with, or having excessive credit exposures to, their nondepository affiliates. Sections 23A 

53 See Title I and Title II of the Dodd-Frank Act. 

54 The Competitive Equality Banking Act of 1987 (CEBA), Pub. L. No. 100-86, § 101(a)(1), 101 Stat. 554, 562, 

redefined “bank” for purposes of the Bank Holding Company Act (BHCA) to include any bank insured by 

the FDIC but specifically excepted certain classes of banks from the BHCA, including CEBA credit card 

banks and certain industrial loan companies. 
CHAPTER 4: Bank Supervision 131 

and 23B also constrain the ability of nondepository affiliates to benefit from the subsidies 

arising from insured institutions’ access to the federal safety net, namely, federal deposit 

insurance and the Federal Reserve System’s discount window and payment systems. To 

these ends, Sections 23A and 23B impose both quantitative and qualitative restrictions on 

transactions between an insured institution and its affiliates. Included in the restrictions 

is a prohibition in Section 23A against the transfer of “low quality assets” to an insured 

institution from an affiliate. 

Although designed primarily as a safeguard, Section 23A also provides for a process 

wherein the federal banking agencies are empowered to exempt transactions from the 

section’s qualitative and quantitative restrictions, if such exemption is “in the public 

interest” and is consistent with the purpose of the statutory provisions limiting interaffiliate transactions. During the crisis, a number of banking organizations sought 

exemptions from Section 23A transaction limits, given the extreme financial distress 

they were experiencing and the potential for insured depository institution subsidiaries 

of holding companies to provide support to their nonbank affiliates. 

These exemption requests were under the primary purview of the Federal Reserve, 

with the FDIC having a consultative role. A number of these Section 23A exemption 

requests were granted, and some were not. Approvals were granted when the requested 

exemptions were viewed as consistent with the safety and soundness of the insured 

institution that would be entering into the otherwise prohibited transaction, and in some 

cases were for the purpose of increasing liquidity to constricted credit markets. 

As became increasingly evident during the crisis, another source of potential risk to 

banks from their holding companies can come from a holding company’s capital and 

funding structure. For example, holding companies may issue debt and downstream the 

proceeds into an insured bank subsidiary in the form of an equity investment in the 

bank. Since the holding company must service the debt it has issued, there is then the 

possibility the bank could be under pressure to pay dividends to the holding company 

to service that debt. The regulator of the insured bank may, of course, cut off the bank’s 

dividend payments to the parent if they pose undue risk to the bank, with concomitant 

financial stress on the holding company. 

In this respect, a noteworthy regulatory development in the inter-crisis years was the 

approval in the 1990s of Trust Preferred Securities (TruPS) as a limited portion of the 

regulatory capital of bank holding companies.55 TruPS were subordinated debt issued by 

a special-purpose entity set up by a bank holding company, with the proceeds of the debt 

typically downstreamed into a subsidiary bank as an equity investment. TruPS generally 

had very long maturities and allowed for the issuing entity to defer the payment of 

dividends to the investors for up to five years, and it was this financial flexibility that was 

55 The term “regulatory capital” refers to the totality of financial components identified by an institution’s 

primary federal regulatory agency—in the case of bank holding companies, the Federal Reserve—that are 

eligible to count toward the satisfaction of the agency’s capital requirements. 
132 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

viewed as meriting their inclusion, within limits, as regulatory capital for bank holding 

companies. Given TruPS’s status as regulatory capital, issuing them was attractive for 

bank holding companies, partly because for tax purposes they were viewed as debt with 

the dividends treated as tax-deductible interest payments.56 

The widespread use of TruPS created unanticipated difficulties during the crisis in 

recapitalizing troubled banks whose parent bank holding companies had issued them. 

The prospect of staving off a potential bank failure by injecting new capital can require the 

bank’s financial stakeholders to make difficult decisions. If the bank’s financial condition 

is sufficiently dire, investing in the organization may be unattractive unless some of the 

organization’s creditors can agree to accept less than full value for their claims. Those 

creditors may be willing to do this if the alternative is perceived to be a bankruptcy where 

they will experience even greater losses. For the troubled banking organization to issue 

equity, moreover, existing shareholders must typically agree, even though their ownership 

interest will be diluted by the issuance of new equity. Again, they may agree to this if the 

alternative is a failure that wipes out their equity investment entirely. 

With this as background, we can touch on some of the complex issues involved in 

recapitalizing banking organizations that had issued TruPS. Many TruPS were pooled into 

collateralized debt obligations (CDOs), the terms of which could not be modified without 

the consent of a high percentage, or even 100 percent, of the TruPS interests outstanding. 

As a practical matter, it was difficult or impossible for a bank holding company (BHC) 

to communicate directly with the holders of the CDO in order to offer to purchase 

CDO interests, or to obtain consent for any collective action by the CDO holders to 

accept less than the full amount of the TruPS indebtedness. In addition, in some states, 

corporation law required that equity investments directly in the bank be approved by 

BHC shareholders, because of the significant dilution of the BHC’s equity interest in the 

bank that would have resulted. 

Sometimes, failure of the subsidiary bank could be averted by its sale to investors while 

the holding company declared bankruptcy. Such situations sometimes involved the use 

by BHCs of Section 363(b) of the bankruptcy code to sell their ownership in subsidiary 

insured institutions to a stronger purchaser willing to recapitalize those institutions. 

The impending bankruptcy of a BHC, however, can be a disruptive event that threatens 

the liquidity of its subsidiary banks. This is the case not only because of counterparty 

concerns but also because the risks of inappropriate transfers that disadvantage the bank 

can tend to be more acute during the time leading up to a BHC’s bankruptcy. The FDIC 

found that it needed to be particularly vigilant during such times; FDIC examiners closely 

monitored liquidity in these instances, in some cases conducting visits to the subsidiary 

banks as often as daily. In many situations involving troubled banks and bank holding 

56 For an extensive discussion of the contractual features of TruPS, see George E. French et al., “Trust Preferred 

Securities and the Capital Strength of Banking Organizations,” FDIC Supervisory Insights 7, no. 2 (2010): 

3–16. https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin10/si_wtr10.pdf. 
CHAPTER 4: Bank Supervision 133 

companies, the FDIC took steps to isolate and protect the insured institution, sometimes 

while its BHC parent filed for bankruptcy, including by preventing the dissipation of 

capital and impermissible transfers from the insured institution to the BHC. 

In other situations, one or more subsidiary banks were troubled in a multi-bank 

holding company ownership structure. When failures occurred in a multi-bank holding 

company, the cross-guarantee provisions of FIRREA, implemented as Section 5(e) of 

the FDI Act, allowed the FDIC to recover part of its costs of handling the failures by 

obtaining reimbursement from other commonly controlled insured institutions.57 Those 

provisions allow the FDIC to assess cross-guarantee liability within two years of the 

failure of a commonly controlled institution, provide the FDIC with broad discretion in 

applying the law, and focus on minimizing costs and taking actions that are in the best 

interests of the DIF. 

During the crisis, the FDIC used its authority to assess cross-guarantee liability 

proactively to minimize losses to the DIF. When a commonly controlled insured bank 

failed, the FDIC carefully analyzed the cost to the DIF in order to determine whether to 

assess cross-guarantee liability immediately or to defer assessment. In the case of two 

companies, the FDIC assessed cross-guarantee liability immediately because deferring 

assessment would have increased the cost of resolution. In other cases, the FDIC 

deferred the assessment, allowing the BHC to determine how to meet the liability to the 

FDIC. Some BHCs sold their remaining banks, giving the FDIC the sales proceeds net of 

selling costs. In other situations, the FDIC accepted payment of a portion of the liability 

as a better alternative than bearing the cost of another bank failure. 

Sometimes the FDIC deferred the assessment of cross-guarantee liability in order 

to increase the incentive for troubled, commonly controlled banks to find a merger 

partner or raise capital to avoid failures. In the case of Capitol Bancorp, Ltd., a multiBHC listed in Table 4.2, the FDIC allowed the sale of subsidiary banks and granted 

cross-guarantee waivers to those institutions to settle the liability. However, the FDIC 

controlled the BHC’s use of the sale proceeds and required the funds to be injected into 

affiliated troubled banks, thereby reducing potential losses to the DIF. 

Granting prospective waivers of cross-guarantee liability was another tool that was 

used to avoid needless bank failures. For example, the FDIC granted a prospective 

waiver to a bank in Texas when its BHC acquired control of another bank, which was 

troubled, and recapitalized it. The prospective waiver eliminated the risk that if the 

acquired troubled bank failed, the BHC’s existing bank would become liable under the 

cross-guarantee regulations. 

57 “Commonly controlled” is defined in note 6. 
134 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Table 4.2. Supervisory Focus and Outcomes for Selected Banking Organizations 

Holding Company Subsidiary Insured Supervisory Focus Outcome
 

Bankruptcy Bank(s)
 

Lehman Brothers 

September 2008 

Capmark Financial 

Group, Inc 

October 2008 

CIT Group, Inc.c 

November 2009 

AmericanWest 

Bancorporation 

October 2010 

Outsource Holdings, 

Inc. 

April 2011 

Premier Bank Holding 

Company, Inc. 

August 2012 

Big Sandy Holding 

Company 

September 2012 

Capitol Bancorp, Ltd. 

August 2012 

First Place Bank 

Corporation 

October 2012 

Woodlands 

Commercial Bank, 

Aurora Bank FSB 

Capmark Bank 

CIT Bank 

AmericanWest Bank 

Jefferson Bank 

Premier Bank 

Mile High Banks 

65 insured banks 

First Place Bank 

insulate bank from 

parent, capital 

restoration, CALMAa 

insulate bank from 

parent, liquidity 

monitoring 

insulate bank from 

parent 

PCA capital directived 

capital restoration, 

problem asset and 

concentration reduction 

capital restoration, 

problem asset and 

concentration reduction 

PCA capital directive, 

“sell or merge” 

capital, concentrations, 

noncore funds, liquidity 

monitoring; “sell, 

merge, or recapitalize” 

capital restoration, 

problem asset reduction 

Chapter 11 bankruptcy; 

banks were wound down,b 

no DIF loss 

Chapter 11 bankruptcy; 

bank was wound down, 

no DIF loss 

Chapter 11 bankruptcy; 

bank survived 

Chapter 11, Section 363 

bankruptcy with sale of 

bank, no DIF loss 

Chapter 11, Section 363 

bankruptcy with sale of 

bank, no DIF loss 

Chapter 11, Section 363 

bankruptcy with sale of 

bank, no DIF loss 

Chapter 11, Section 363 

bankruptcy with sale of 

bank, no DIF loss 

6 bank failures, multiple 

banks merged or sold 

with proceeds invested in 

troubled banks to waive 

cross-guarantee liabilities 

Chapter 11, Section 363 

bankruptcy with sale of 

bank, no DIF loss 

a CALMA refers to Capital and Liquidity Maintenance Agreement. 

b Banks that were “wound down” went through an orderly process of voluntarily selling assets, paying off 

depositors and other creditors, and ultimately ceasing operations without loss to the DIF. 

CIT Group is not to be confused with Citigroup, an unrelated institution. 

d PCA refers to prompt corrective action (see note 37). 

c 
CHAPTER 4: Bank Supervision 135 

The FDIC imposed a variety of conditions when granting cross-guarantee waivers. These 

conditions included requiring that proceeds from the sale of a bank holding company’s 

subsidiaries be used to make equity investments in one or more of its troubled banks, 

requiring that directors and executive officers who materially contributed to the problems 

of the failing bank resign or be subject to ongoing management restrictions, or accepting 

partial payment of the cross-guarantee liability in lieu of the full amount. 

Such strategies were effective in insulating banks from problems at their parent or 

affiliated companies and in averting losses to the Deposit Insurance Fund. Table 4.2 lists 

examples where significant problems at banking organizations with a holding company 

structure were resolved mostly or entirely without loss to the Deposit Insurance Fund.58 

For reasons of space, the list of supervisory strategies in the table is not complete. 

These strategies included a focus on preventing inappropriate transactions with the 

parent company and affiliates, limiting dividend payments, recapitalizing troubled 

banks, entering into a CALMA, incentivizing corrective action through the type of 

“sell or merge” language in enforcement actions alluded to earlier in this chapter, and 

monitoring liquidity. The phrase “Section 363 sale of bank” in the “outcomes” column 

refers to the sale of an insured bank by a BHC as part of its reorganization, with such sale 

governed by Bankruptcy Code Section 363. From the specific standpoint of protecting 

the DIF in severe circumstances where the probability of loss was elevated, the examples 

in Table 4.2 can be viewed as success stories. The section below titled “Effectiveness and 

Appropriateness of Supervisory Efforts Related to Troubled Banks,” discusses the success 

of supervisory actions from a broader perspective. 

Private Equity Recapitalizations 

As discussed in chapter 6, during the course of the crisis several private equity investors 

expressed an interest in purchasing failed banks. The FDIC’s Board of Directors adopted 

a Statement of Policy (SOP) to provide guidance to private capital investors interested 

in acquiring or investing in failed insured depository institutions regarding the terms 

and conditions for such investments or acquisitions.59 Some groups sought shelf charters 

from the OCC and others sought to acquire a small existing charter that could then 

be used to make failed-bank acquisitions.60 Supervision staff determined the readiness 

of both types of proposed ownership groups relative to the statutory requirements for 

58 Table 4.2 is not necessarily a complete list of instances in which a holding company entered bankruptcy but 

some or all of its bank subsidiaries did not fail. 

59 FDIC, “Final Statement of Policy of Qualifications for Failed Bank Acquisitions,”74 Fed. Reg., 45440–45499 

(Sept. 2, 2009), https://www.fdic.gov/regulations/laws/federal/2009/09FinalSOP92.pdf>https://www.fdic. 

gov/regulations/laws/federal/2009/09FinalSOP92.pdf. 

60 A shelf charter is a conditional banking charter granted to an organizing group for the specific purpose of 

acquiring one or more failing banks. It is conditional on the organizing group’s being selected as the winning 

bidder for the failing bank or banks. (On the bidding process for failing banks, see chapter 6.) 
136 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

deposit insurance and the principles in the SOP; in addition, supervision staff adopted 

new procedures to evaluate the activities of the institutions relative to the principles 

contained in the SOP. 

Effectiveness and Appropriateness of Supervisory Efforts Related to Troubled 

Banks 

The strategies and approaches used by the FDIC to supervise a troubled bank can be 

labor-intensive and time-sensitive. Examining a bank that is in seriously weakened 

condition or that seems to have potential issues of fraud or insider abuse requires 

significantly more examiner time than does examining a healthy bank of comparable 

size.61 Developing, negotiating, and finalizing informal or formal enforcement actions, as 

well as monitoring an institution’s compliance with them, are also significantly resourceintensive. And the day-to-day liquidity monitoring and eleventh-hour efforts to handle a 

troubled bank in a way that will avoid or minimize losses to the Deposit Insurance Fund 

can similarly tap a significant amount of supervisory resources. 

However, these intensive supervisory efforts are worthwhile as they make a beneficial 

difference to the ultimate outcomes for troubled banks. For example, between January 

2007 and September 2013, for 1,441 FDIC-supervised 3-rated banks that entered into 

informal actions, nearly two-thirds of the informal actions were effective at preventing a 

further rating deterioration at subsequent examinations. 

Moreover, a study by the FDIC OIG found that enforcement actions did not hinder an 

institution’s ability to raise capital. The OIG report noted that between 2008 and 2011, 

more than 50 percent of the FDIC-supervised financial institutions that were subject to 

informal or formal enforcement actions received material capital injections (“material” 

was defined for the study as an amount raised during a year that was at least $100,000 and 

0.5 percent of total assets at the end of the year). The report stated, “The extent of capital 

injections for these institutions compares favorably to all active financial institutions 

over that same period.”62 

The same report stated the OIG’s view that banking agency enforcement actions 

(including the FDIC’s) were applied in a manner consistent with policies and were 

supported by the findings in examination reports.63 Specifically, “We also determined 

there was a correlation between examination ratings, key financial ratios, and enforcement 

actions, which, in our view, illustrates that regulators applied actions fairly across the 

61 For example, the FDIC OIG’s report “The FDIC’s Examination Process for Small Community Banks,” 

EVAL-13-001, August 2012, page 11, https://www.fdicig.gov/sites/default/files/publications/12-011AUD. 

pdf, indicated that typical timelines for the FDIC to issue an examination report following on-site work 

were two to four weeks for banks rated 1 or 2, and four to six weeks for banks rated 3, 4, or 5. 

62 FDIC OIG, “Comprehensive Study on the Impact of the Failure of Insured Depository Institutions,” Report 

EVAL-13-002, January 2013, p. 114, https://www.fdicig.gov/sites/default/files/publications/13-002EV.pdf. 

63 Ibid., 15–16. 
CHAPTER 4: Bank Supervision 137 

institutions they regulated.”64 The report found, in addition, that enforcement actions 

were terminated uniformly and appropriately and in a manner consistent with policies 

and procedures. In other words, enforcement actions were terminated when institutions 

were in material compliance with the conditions laid down in the enforcement actions 

and had improved sufficiently, and the actions were not terminated when institutions 

continued to present safety-and-soundness risks. 

In all, of the 1,783 insured depository institutions that were designated as problem 

banks between January 1, 2008 and March 31, 2017, 523 had failed as of March 31, 2017; 

112 remained in problem status; 294 had merged with other institutions in privatesector transactions without FDIC assistance; and 854, the largest portion, were no longer 

problem banks (see Figure 4.7). 

Figure 4.7. Status of Institutions on Problem-Bank List, 2008–Q1 2017 

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Upgrades Mergers Problem Bank List Failures

854 

294

112

523

No. IDIs

1Q 2008

1Q 2009

1Q 2010

1Q 2011

1Q 2012

1Q 2013

1Q 2014

1Q 2015

1Q 2016

1Q 2017

In short, the experience strongly suggests that the corrective actions, formal and 

informal, undertaken by the FDIC and the other banking regulators during the crisis were 

effective in reducing the number of banks that ultimately failed, effective in reducing the 

cost of the crisis to the Deposit Insurance Fund, and effective in returning the banking 

industry to health. 

64 Ibid., 16. 
138 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The Aftermath of the Crisis: Lessons Learned for Supervision 

The building up of risk in the banking industry during the inter-crisis years, and the 

sometimes belated supervisory policy response, demonstrates that the choices banks and 

bank supervisors make during times of prosperity can have important consequences for 

the long-term safety and soundness of individual banks and the banking industry as a 

whole. The choices for banks in the pre-crisis years related to risk-taking, including the 

degree of involvement in subprime and other nontraditional mortgage products and the 

growth of ADC lending. For bank supervisors the choices related to how forcefully to 

respond to the risks that were emerging. The crisis itself is a reminder of how quickly 

problems in the banking industry can ramp up and how important the supervisory 

response is to containing and mitigating damage. This concluding section reflects on 

what FDIC staff views as the most important lessons of the crisis for bank supervisors. 

Lesson 1: Prosperous Times Can Mask the Building Up of Risks 

Perhaps the most striking feature of pre-crisis banking conditions when viewed in 

hindsight is the unbroken string of earnings records and the steadily declining caseload 

of problem banks. In retrospect, however, it is clear that this earnings growth masked a 

significant buildup of risks in the banking industry. Although the risks were identified 

by examiners and pointed out in reports of examination, the apparently strong financial 

condition of institutions was weighed more heavily in the rating determinations. At 

a policy level, the agencies’ response to the accumulating risks was limited to issuing 

supervisory guidance that was, in retrospect, belated. Taking actions to constrain risktaking practices during a period of industry prosperity can be unpopular and meet with 

significant resistance. The issues involved in such situations call to mind the saying about 

taking away the punch bowl just when the party is warming up. 

Lesson 2: Past Performance Is Not a Guide to Future Performance 

Mining data to review characteristics of past failed and problem banks can have 

considerable value, for underlying issues involving banks’ appetite for risk tend to be 

repeated. Nonetheless, it is important to remember that past performance is not always 

a guide to future performance. For example, many observers in the pre-crisis period 

believed that a national real estate market downturn was highly unlikely, since past real 

estate downturns had been regional. In the current context, that example is a reminder to 

supervisors to remain highly attentive to new issues, such as cybersecurity or the effects 

of a prolonged low-interest-rate environment, and more generally not to assume that 

issues that have not caused problems in the past will not cause problems in the future. 

Supervisors should never allow themselves to become complacent. 
CHAPTER 4: Bank Supervision 139 

Lesson 3: Choices about Risk and Return Do Matter 

Bank managers always have choices to make about how aggressively to pursue earnings 

growth and whether to do so through new lending programs, trading activities, higheryielding investments, or other avenues. Generally, greater returns are achieved only by 

taking greater risks. The purpose of risk management in banking is to ensure that risktaking is prudent and does not threaten the viability of the bank. Figure 4.8 provides a 

reminder of the trade-off between risk and return in banking. Before the crisis, large bank 

holding companies’ activities boosted their returns on tangible equity to extraordinarily 

high levels—but this was followed in 2008 by the financial collapse of a number of 

these institutions. The lesson to examiners, supervisors, the banking industry, and its 

investors is that notwithstanding the apparent profitability of an institution, there may 

be significant underlying risks that should be addressed. 

Figure 4.8. Return on Equity, 1869–2014 

Net Income/Equitya
 

35%
 

-15% 

1869 1898 1927 1956 1985 2014 

Source: FDIC; Historical Statistics of the United States, Millenium Edition Online, 2016.
 

Note: Data from 1869 to 1933 are only for national banks, data from 1934 through 2014 are for all commercial banks, and 


top 5 BHC data from 2001 through 2014 are for the five largest BHCs by total assets in any given year.
 

a From 2001 forward, return on equity for both the BHC and bank series is net income divided by tangible equity; before 


2001 return on equity is net income divided by total equity.
 

-5% 

-10% 

0% 

5% 

10% 

15% 

20% 

25% 

30% ROE 

Top 5 BHC ROE 
140 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Lesson 4: Call Report Data Can Help Identify Risk 

Call Report data can provide important indicators of which banks may be accepting 

relatively higher levels of risk. For example, concentrations in ADC lending, rapid asset 

growth, higher levels of potentially volatile funding, and lower levels of capital during 

the pre-crisis period were important indicators of banks that failed during the crisis. 

Although the Call Report data alone do not shed light on important bank-specific risk 

practices, governance, and other matters, data over multiple business cycles and the two 

most recent banking crises make it clear that the red flags presented by extreme values of 

such indicators are real and warrant supervisory attention. 

Lesson 5: Risk Management Drives Outcomes 

Studies conducted by the FDIC OIG based on Material Loss Reviews indicate that 

during the crisis, the level of ADC concentrations, the risk management of those 

concentrations, and the responsiveness to supervisory concerns (where applicable) all 

mattered greatly in separating the surviving banks from those that failed. In describing 

the characteristics of banks with high ADC concentrations that nonetheless remained 

in satisfactory condition, a recent OIG report stated, “Ultimately, the strategic decisions 

and disciplined, values-based practices and actions taken by the Boards and management 

helped to mitigate and control the institutions’ overall ADC loan risk exposure and 

allowed them to react to a changing economic environment.”65 In particular, the report 

stated that banks specializing in ADC lending while remaining in satisfactory condition 

throughout the period were more likely to have implemented more-conservative 

growth strategies; relied on core deposits and limited net noncore funding dependence; 

implemented prudent risk management practices; limited speculative lending, loan 

participations, and out-of-area lending; and maintained stable capital levels and access 

to additional capital if needed. 

Lesson 6: The Most Important Bank Risk Factors Can Be Evaluated Only On-Site 

The safety and soundness of an insured depository institution depends on many factors 

that supervisors cannot evaluate satisfactorily by reviewing Call Reports or other 

external information. These factors include the quality of loan underwriting and credit 

administration; the presence or absence of effective risk limits and internal controls; the 

extent of compliance with applicable laws; and the presence or absence of issues involving 

fraud or insider abuse. The FDIC’s experience is that when it comes to determining 

a bank’s long-term viability, the quality of management and the effectiveness of 

governance are of paramount importance. Such factors can be evaluated only with an 

on-site examination that includes an appropriate level of transaction testing—that is, 

examination procedures designed to check the reliability of key risk 

65 FDIC OIG, “Acquisition, Development and Construction Loan Concentration Study,” page iii. 
CHAPTER 4: Bank Supervision 141 

metrics and internal controls. Thus, although supervisors explore the use of enhanced 

information technology to potentially allow off-site examination hours to constitute a 

greater proportion of total hours, an in-depth on-site component of the examination 

remains indispensable. 

Lesson 7: Supervisors Should Require Corrective Action When Risk Management 

Is Deficient 

Material Loss Reviews conducted by the FDIC Office of Inspector General often concluded 

that FDIC examiners drew attention to the risk management deficiencies or issues that 

ultimately led to the bank’s failure, generally well before the failure. Recommendations 

to address the deficiencies were typically included in the examination report that was 

transmitted to the bank. However, not until the bank’s financial condition deteriorated 

did those recommendations translate to rating downgrades or enforcement actions. A 

frequently recurring OIG finding in such MLRs was that the FDIC could have been, or 

should have been, more assertive in downgrading bank ratings and requiring corrective 

action before the bank’s problems became unmanageable. 

The FDIC agreed with the findings of the MLRs,66 and in fact it had come to a similar 

conclusion through an internal review of the examination program completed at the end 

of 2007. The FDIC’s conclusion in that internal review was that problematic practices 

should have been addressed more forcefully before they led to problematic conditions, 

particularly with respect to credit administration deficiencies and asset quality ratings. 

In response to the findings of the internal review and the MLRs, the FDIC’s efforts 

to address risks in banks more promptly have included training examiners on the 

importance of proactive and forward-looking supervision to address deficiencies in risk 

management at an early stage, before problems become so severe that it is too late to 

address them; revising the “concentrations page” in the report of examination, designed 

to focus examiner attention on the quality of risk management of lending and funding 

concentrations; and revising the manual of examination policies, the case manager 

procedures, and other supervisory documents so as to incorporate enhanced guidance 

on matters requiring attention by the bank’s board of directors. 

Lesson 8: New Banks Require Extra Attention 

As noted above, new banks have historically been disproportionately represented among 

failing institutions, and the recent crisis was no exception. The FDIC has long devoted 

extra supervisory efforts to new banks, which are often referred to as de novo banks. 

In the past, these efforts included an annual examination during the three-year de 

novo period (even if other factors would have made the bank eligible for an 18-month 

examination 

66 Written responses to the MLRs are prepared by FDIC staff, and specifically by the director of the FDIC 

division responsible for safety-and-soundness supervision. 
142 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

cycle); a requirement that new banks maintain leverage capital ratios of at least 8 percent 

during the de novo period; and a requirement that the new bank adhere during the 

de novo period to the business plan that was the basis for its approved application for 

deposit insurance.67 During the crisis, given the severity of problems de novo banks were 

experiencing, the FDIC increased the de novo period from three to seven years. Recently, 

recognizing that the crisis had receded and that the FDIC had improved other aspects 

of its supervisory processes, the FDIC restored the three-year de novo period. Going 

forward, as the economic environment becomes more propitious for the establishment 

of new banks, maintaining supervisory focus on the safe and sound operation of these 

institutions will be important. 

Lesson 9: Large Banks Require Extra Attention 

In all, nine insured banks with assets of $10 billion or more failed during the years 2008 

through 2013. In addition, Citigroup and Bank of America Corporation did not fail but 

benefited from individually targeted federal assistance programs;68 Wachovia nearly 

failed but was acquired by Wells Fargo without federal assistance; and each of the five 

largest investment banks failed or was acquired in stressed circumstances or became 

a bank holding company.69 But as severe as the liquidity problems of large financial 

institutions were during the crisis, they could have been much worse. To gain a sense 

of what could have happened, one need only review the list of financial institutions that 

received special Federal Reserve liquidity assistance from programs created during the 

crisis, and the amounts borrowed under the programs.70 Had these programs, along with 

programs of the Treasury and the FDIC, not been created, many more large financial 

institutions would likely have failed. 

The gravity of the liquidity issues that surfaced during the crisis is a reminder of 

how sensitive to counterparty runs large banking organizations can be. This reminder 

highlights the importance for these institutions of maintaining strong capital and liquidity 

67 Under the federal banking agencies’ prompt corrective action regulations, insured banks must satisfy a 

minimum leverage ratio requirement of 4 percent to be designated “adequately capitalized,” and a leverage 

ratio of 5 percent to be designated “well capitalized.” These are the regulatory minimum values of the leverage 

ratio needed to achieve these designations, but the agencies have the authority to require individual banks 

to hold more capital depending on their circumstances. Maintaining an 8 percent leverage ratio (or possibly 

more, if warranted by the specific facts) during the de novo period is a standard condition the FDIC imposes 

before approving an application for deposit insurance, as documented in the FDIC Statement of Policy on 

Applications for Deposit Insurance, Federal Register, Vol. 63, No. 161, August 20, 1998. 

68 As described in more detail in chapter 3, Citigroup actually received assistance while Bank of America 

benefited from the announcement that assistance was available to it. 

69 See chapter 1 for a discussion of how the five largest investment banks (Goldman Sachs, Morgan Stanley, 

Merrill Lynch, Bear Stearns, and Lehman Brothers) fared during 2008. 

70 These were liquidity programs of broad availability as opposed to the targeted assistance announced 

for Citigroup and Bank of America. This information is available at https://www.federalreserve.gov/ 

regreform/reform-transaction.htm. 
CHAPTER 4: Bank Supervision 143 

positions and the importance for the FDIC (and the other federal banking agencies) of 

having robust programs in place to understand and address the risks undertaken by large 

institutions. Risk assessment for these institutions needs to be more effective than it was 

in the years leading up to the crisis. On the basis of the experience of the crisis, the FDIC 

has implemented a number of improvements to its risk assessment of large, complex 

financial institutions. These include an expanded on-site presence at selected large 

banking organizations, intensive off-site horizontal analysis of risks posed by all large 

banking organizations,71 and the review of stress-testing results.72 Supervision staff also 

supports the preparedness of the FDIC’s resolutions staff (see chapter 6) by reviewing the 

resolution plans filed by large banking organizations.73 

Lesson 10: Bank Supervision Benefits from Steady Focus 

The pre-crisis period was notable for a number of significant changes in the bank 

supervision process. These included a move first to risk-focused supervision and then 

to streamlined supervision under the MERIT examination program and directives to 

significantly reduce overall examination hours. These changes led to a significantly 

smaller supervision workforce at a time when the banking industry was growing in 

asset size and was taking on significant new risks. And after the crisis finally erupted, 

the smaller size of the workforce created challenges in responding to it. Changes in 

examination processes are sometimes necessary or advisable, but the best results are 

likely to follow from an incremental approach to change and a steady and consistent 

focus on the importance of examining and supervising banks. 

Lesson 11: Bank Examination and Supervision Require Expertise 

One of the greatest strengths of the FDIC’s bank supervision program during the 

crisis was its corps of seasoned examiners and supervisors, many of whom had been 

examining banks since the 1980s or even the 1970s, and a number of whom returned 

to the examination force from retirement. This depth of experience was critical to the 

FDIC’s ability to respond to the crisis with examinations and the tailoring of 

71 For further information, see FDIC OIG, “The FDIC’s Risk Monitoring of Systemically Important Financial 

Institutions’ Proximity and Speed to Default or Danger of Default,” Report EVAL-17-003, January 2017, 

https://www.fdicig.gov/sites/default/files/publications/17-003EV.pdf. 

72 Stress testing in this context refers to an analysis of how a bank’s financial condition may change over time 

under various assumed adverse economic scenarios. Formal requirements for stress testing are part of 

Section 165 of the Dodd-Frank Act. 

73 There are two types of resolution plan documents. The first type, required by the Dodd-Frank Act and 

often referred to as living wills, is prepared by large financial institutions and submitted to the FDIC and 

the Federal Reserve with information and analysis to show that the company could be resolved under 

bankruptcy. The second type, required by Part 360 of the FDIC regulations, requires large insured depository 

institutions to submit plans to the FDIC that should enable the FDIC to resolve the bank under the Federal 

Deposit Insurance Act. 
144 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

appropriate informal and formal enforcement actions that helped make it possible for 

many banks to return to health. 

This experience highlights the importance of the hiring process for maintaining 

a steady flow of new examiners as a foundation for bank supervision in the future; 

the importance of a continued rigorous examiner commissioning process; and the 

importance of efforts to ensure that new generations of examiners are able to benefit 

from the knowledge and experience of those who came before them. 
CHAPTER 4: Bank Supervision 145 

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Reserve Credit and Liquidity Facilities.” Updated December 9, 2013. https://www. 

federalreserve.gov/regreform/reform-transaction.htm. 

French, George E., Andrea N. Plante, Eric W. Reither, and Ryan D. Sheller. “Trust Preferred 

Securities and the Capital Strength of Banking Organizations.” FDIC Supervisory Insights 

7, no. 2 (2010): 3–16. https://www.fdic.gov/regulations/examinations/supervisory/ 

insights/siwin10/si_wtr10.pdf. 

Goñi, Catherine H., Paul S. Vigil, Larry R. Von Arb, and Kenneth A. Weber. “Supervisory 

Trends: ‘Matters Requiring Board Attention’ Highlight Evolving Risks in Banking.” 

FDIC Supervisory Insights 11, no. 1 (2014): 8–13. https://www.fdic.gov/regulations/ 

examinations/supervisory/insights/sisum14/sisummer2014.pdf. 
148 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Hearings on Recent Bank Failures and Regulatory Initiatives Before the House Committee 

on Banking and Financial Services. 106th Cong. (Feb. 8, 2000) (statement of Donna 

Tanoue, Chairman of the Federal Deposit Insurance Corporation). http://archives. 

financialservices.house.gov/banking/2800tan.shtml. 

Hughes, Scott, Jack Phelps, Allen Puwalski, and Norman Williams. “Housing Bubble 

Concerns and the Outlook for Mortgage Credit Quality.” FDIC Regional Outlook 

National Edition, Spring 2004. https://www.fdic.gov/bank/analytical/regional/ro20041q/ 

na/infocus.html. 

Hughes, Scott, Judy Plock, Joan Schneider, and Norman Williams. “In Focus This 

Quarter: Housing Market Has Held Up Well in This Recession, but Some Issues Raise 

Concern.” FDIC Regional Outlook National Edition, Q1 2002. https://www.fdic.gov/ 

bank/analytical/regional/ro20021q/na/infocus.html. 

Interagency final joint guidance. “Concentrations in Commercial Real Estate Lending, 

Sound Risk Management Practices.” 71 Federal Register 74580–74588, December 12, 

2006. https://www.gpo.gov/fdsys/pkg/FR-2006-12-12/pdf/06-9630.pdf. 

“Interagency Guidance on Nontraditional Mortgage Product Risks.” 71 Federal Register 

58609–58618, October 4, 2006. https://www.gpo.gov/fdsys/pkg/FR-2006-10-04/pdf/06­

8480.pdf. 

Kalser, Kathy R. “Financial Markets.” FDIC Regional Outlook, San Francisco, Q4 1997. 

https://www.fdic.gov/bank/analytical/regional/ro19973q/sf/finmkt.html. 

Kalser, Kathy R., and Debra L. Novak, “Subprime Lending: A Time for Caution.” FDIC 

Regional Outlook, San Francisco, Q3 1997. https://www.fdic.gov/bank/analytical/ 

regional/ro19973q/sf/infocus1.html. 

Lee, Yan, and Chiwon Yom. “The Entry, Performance and Risk Profile of De Novo 

Banks.” FDIC Center for Financial Research Working Paper 2016 no. 3. https://www. 

fdic.gov/bank/analytical/cfr/2016/wp2016/2016-03.pdf. 

O’Keefe, John, and Chiwon Yom. “Offsite Detection of Insider Abuse and Bank Fraud 

among U.S. Failed Banks 1989–2015.” FDIC Center for Financial Research Working Paper 

2017 no. 6. https://www.fdic.gov/bank/analytical/cfr/2017/wp2017/cfr-wp2017-06.pdf. 

Reich, John. “The Lessons of Superior.” August 21, 2001. https://www.fdic.gov/news/ 

news/speeches/archives/2001/sp28aug01.html. 
CHAPTER 4: Bank Supervision 149 

“Uniform Financial Institutions Rating System.” 61 Federal Register 67021–67029, 

December 19, 1996. https://www.gpo.gov/fdsys/pkg/FR-1996-07-18/pdf/96-18187.pdf. 

U.S. Department of the Treasury and Federal Deposit Insurance Corporation, Offices of 

Inspector General. “Evaluation of Federal Regulatory Oversight of Washington Mutual 

Bank.” Report EVAL-10-002. April 2010. https://www.fdicig.gov/sites/default/files/ 

publications/10-002EV.pdf. 
150 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 
5
 

Deposit Insurance: Fund Management and

Risk-Based Deposit Insurance Assessments 

Introduction 

The 2008 financial crisis and economic downturn precipitated a banking crisis, causing a 

sharp increase in the number of failures of FDIC-insured institutions. After several years 

in which there had been few or no failures, between 2008 and 2013 a total of 489 banks 

and thrifts failed, 157 during 2010 alone (the most since 1992).1

 In 2008 and 2009, as the 

number of bank failures increased, losses incurred by the Deposit Insurance Fund (DIF, 

or the fund) to close failing banks and protect insured depositors significantly exceeded 

fund revenue. The FDIC took several steps intended to keep the fund in the black. When 

these efforts failed, the FDIC turned to ensuring that the fund had sufficient liquid assets 

to continue to protect insured depositors at failed banks. In this effort, the FDIC was 

successful. From 2011 through 2016, the FDIC used the expanded authority granted in the 

Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank) to 

substantially revise both its fund management strategy and its methodology for risk-based 

deposit insurance assessments. (For definitions of key terms, see the box.) 

The FDIC’s approach to deposit insurance fund management and risk-based pricing is 

governed by statute. This chapter traces the evolution of the statutory framework and— 

within that framework—the evolution of the FDIC’s fund management strategy and 

risk-based pricing methods, beginning as the banking crisis was about to erupt, passing 

through a period of adaptive responses, and culminating with implementation of the 

deposit insurance reforms authorized by Dodd-Frank. 

Bank and thrift failures, here and elsewhere in this chapter, exclude instances where open-bank assistance 

was provided in conjunction with a systemic risk exception. See chapter 3 for more details. In 1992, 179 

banks and thrifts failed, including thrift failures handled by the Resolution Trust Corporation (which was 

created by Congress in 1989 to resolve insolvent thrifts). 

1 
152 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Definitions of Key Terms 

The Deposit Insurance Fund (DIF) is used to protect insured depositors and to 

close failing banks. It was formed in 2006 from the merger of two predecessor 

funds, the Bank Insurance Fund and the Savings Association Insurance Fund. In 

this chapter, references to the DIF before 2006 refer to a hypothetical combination 

of the two funds. 

Fund management consists, first, of determining the proper size of the DIF and, 

second, setting overall assessment rates that are sufficient to maintain or achieve 

the proper fund size. (The appendix of this chapter traces the evolution of the 

assessment rate schedules from Q1 2009 to the present.) 

The critical measure of the adequacy of the DIF is the reserve ratio, which is 

the ratio of the fund balance (or net worth) to estimated insured deposits. The 

designated reserve ratio (DRR) has generally been defined as the minimum target 

for the reserve ratio, but for a period of about ten years it also effectively served 

to restrain growth above the target. Under the current statute, the FDIC views the 

DRR—which the FDIC must set each year—as a long-term minimum target ratio. 

Risk-based pricing refers to the way the FDIC charges banks different 

assessment rates for the differing risks they pose to the DIF, given the overall level of 

assessment rates the FDIC has set to attain its fund management goals. To calculate 

a bank’s deposit insurance assessment, the bank’s assessment rate is multiplied by 

its assessment base. 

Background: Fund Management and Risk-Based Pricing at the 

Beginning of the Banking Crisis 

When the banking crisis erupted in 2008, the framework for fund management and riskbased deposit insurance pricing was one that had been put in place by the Federal Deposit 

Insurance Reform Act of 2005 (FDIRA), enacted in February 2006 on the recommendation 

of the FDIC.2 FDIRA ended a ten-year-old statutory restriction (1996–2006) on the FDIC’s 

authority to assess most banks—specifically, those well capitalized and highly rated by their 

supervisors—as long as the reserve ratio was at or above 1.25 percent. As a result of this 

restriction, growth in the fund balance failed to keep pace with insured deposit growth, 

leaving the reserve ratio at year-end 2006 (1.21 percent) 12 basis points lower than it had 

been at the end of 1996 (1.33 percent). (A basis point is one one-hundredth of a percent.) 

Federal Deposit Insurance Reform Act of 2005, Pub. L. No. 109-171, 120 Stat. 9 (2006). The reason for the 

discrepancy in dates is that the act was included as Title 2 in the Deficit Reduction Act of 2005, which was 

signed into law in February 2006. 

2 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 153 

Managing the Size of the DIF 

FDIRA, in contrast to the law it replaced, permitted the FDIC to set the target reserve 

ratio (the DRR) each year between 1.15 and 1.50 percent. If the actual reserve ratio 

exceeded 1.50 percent, however, the FDIC was required to return amounts in the fund 

above 1.50 percent to the industry through “dividends.” Thus the fund had a hard cap 

of 1.50 percent. In addition, if the reserve ratio was between 1.35 and 1.50 percent, the 

FDIC was required to pay dividends to the industry equal to half of all amounts above 

1.35 percent. FDIRA did allow the FDIC to suspend dividends temporarily if the DIF 

faced a significant risk of high losses. (During the period when this provision of FDIRA 

was in effect, the reserve ratio never reached 1.35 percent, so no dividends were paid.) 

FDIRA also directed the FDIC’s Board of Directors, when setting the DRR for any year, 

to consider various factors with the general objective of increasing the fund under 

more favorable economic conditions so that the fund could withstand declines under 

adverse conditions without the need for sharp, procyclical increases in assessments.3 

(“Procyclical” assessments increase when banking conditions are bad and decrease when 

they are good.) 

Under the authority granted by FDIRA, the FDIC set the DRR at 1.25 percent for 

2007 and 2008 (the same target that had been in effect since 1989) and began charging 

every bank, including the least risky, an insurance premium, which the FDIC had not 

been able to do for about 10 years, as explained above. The Corporation’s intent was to 

have the reserve ratio increase gradually, consistent with FDIRA’s objective that the fund 

be allowed to increase when conditions were favorable so that it could decline under 

adverse conditions without the need for sharp increases in assessments.4

 In 2007, the 

outlook for economic conditions affecting banks was favorable, and no bank had failed 

in two years. But FDIRA included one requirement that had a fundamentally limiting 

effect on reserve ratio growth: it required the Corporation to provide credits to offset the 

premiums of banks that had helped rebuild the insurance funds in the early to middle 

1990s. These credits, combined with insured deposit growth, resulted in a reserve ratio 

at the end of 2007—just before the crisis—that was virtually unchanged from its level a 

year earlier: 1.21 percent at year-end 2006, 1.22 percent at year-end 2007. 

3 Under FDIRA, the factors that the Board is required to consider are (1) the risk of losses to the DIF in the 

current and future years, historic experience, and potential and estimated losses from insured depository 

institutions; (2) economic conditions generally affecting insured depository institutions; (3) the importance 

of preventing sharp swings in assessment rates for insured depository institutions; and (4) other factors 

deemed by the Board to be appropriate, consistent with FDIRA’s requirements. See Section 2105 of FDIRA, 

codified at 12 U.S.C. § 1817(b)(3)(C). 

4 71 Fed. Reg. 69282, 69305 (Nov. 30, 2006). 
154 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Implementing Risk-Based Pricing 

The ten-year restriction on the FDIC’s ability to charge assessments to healthy banks as 

long as the reserve ratio was at or above the statutory 1.25 percent reserve ratio target5 

effectively eliminated assessments for at least 90 percent of insured institutions at any 

given time during the ten years—even though during that period the banking industry 

was generally prosperous and healthy. FDIRA restored the FDIC’s discretion to price 

deposit insurance according to risk for all insured institutions regardless of the level 

of the reserve ratio. 

With its discretion to price for risk restored, the FDIC updated its risk-based pricing 

methods. The original risk-based method, which was required by statute, used a bank’s 

capital level and supervisory rating6

 to place the bank into one of nine risk categories 

that determined the bank’s assessment rate. This method took effect in 1993. Effective 

at the beginning of 2007, the FDIC collapsed the nine risk-based pricing categories into 

four (Risk Categories I through IV, with I being the lowest risk). A 2 basis point range 

of assessment rates applied to Risk Category I, which contained the greatest number of 

banks. Banks in this risk category that did not pay the minimum or maximum rates paid 

rates that varied between the minimum and maximum. Banks in one of the other risk 

categories paid a single rate applicable to that category. 

At the same time, the FDIC adopted separate pricing methods for small banks and 

large banks to differentiate risk within Risk Category I. (Generally, a small bank is 

defined as having less than $10 billion in assets, and a large bank as having at least $10 

billion in assets.)7 

For small banks within Risk Category I, the FDIC used a combination of CAMELS 

component ratings and financial ratios8

 to estimate the probability that a bank’s CAMELS 

composite rating would be downgraded to 3, 4, or 5 at the bank’s next examination (such 

a downgrade would signal deterioration in the bank’s condition), and thereby determine 

the bank’s assessment rate. 

5 Deposit Insurance Funds Act, Pub. L. No. 104-208, 60 Stat. 446 (1996). 

6 These bank supervisory ratings are known as CAMELS ratings. CAMELS stands for Capital adequacy, Asset 

quality, Management, Earnings, Liquidity, and Sensitivity to market risk. CAMELS ratings are on a scale 

of 1 to 5, with a 1-rating indicating greatest strength in performance and risk management and the lowest 

level of supervisory concern. At the other end of the scale, a 5-rating indicates the weakest performance, 

inadequate risk management, and the highest level of supervisory concern. The CAMELS composite rating 

is derived from an evaluation of the six CAMELS components; although the composite rating is generally a 

close reflection of the assigned component ratings, it is not an arithmetic average of the component ratings. 

The original risk-based method actually used a bank’s CAMEL composite rating, since the “S” rating was not 

created until 1995. 

7 12 CFR § 327.8(e) and (f). 

8 The financial ratios included the Tier 1 leverage ratio, a ratio of net income to assets, and several asset 

performance ratios. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 155 

For large banks within Risk Category I, the FDIC used a combination of CAMELS 

component ratings and long-term-debt issuer ratings to determine assessment rates. For 

large banks in Risk Category I that did not have long-term-debt issuer ratings, financial 

ratios were used instead. 

Fund Management and Risk-Based Pricing during the Banking 

Crisis, 2008–2009 

After no banks failed in 2005 and 2006 and only three failed in 2007, failures began to 

climb in 2008, marking the onset of the banking crisis. The DIF balance shrank from 

$52.8 billion on March 31, 2008, to $45.2 billion on June 30 as a result of losses from 

actual bank failures as well as an increase in loss reserves for expected bank failures. 

(Just as banks reserve for losses on troubled loans, the FDIC reserves for anticipated 

losses to the DIF from insured institution failures. An increase in these reserves, which 

are known as the contingent loss reserve, reduces the fund balance, or net worth.) 

The fund’s contingent loss reserve increased from $583 million on March 31 to $10.59 

billion at June 30. The largest contributor to the increase in the contingent loss reserve 

during the second quarter was the reserve for estimated losses associated with the 

failure of IndyMac (which was closed in July).9

 Primarily as a result of the increase in 

the contingent loss reserve, the reserve ratio fell from 1.19 percent at March 31 to 1.01 

percent at June 30.10 (See Figure 5.1.) The DIF balance and reserve ratio fell throughout 

the rest of 2008 and 2009 as losses from actual and expected failures mounted. A total of 

25 banks failed in 2008, and 140 in 2009, leaving the fund balance negative. Mounting 

failures also began draining the fund’s liquid assets, which the FDIC needed to close 

failing banks in a timely manner and to protect insured depositors. 

For more detail about the IndyMac resolution, see chapter 6. 

10 This was the lowest reserve ratio since March 31, 1995, when the combined reserve ratio of the Bank 

Insurance Fund and the Savings Association Insurance Fund (see box above) was 0.98 percent. 

9 
156 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Figure 5.1. Timeline of Events and Reserve Ratio Trends Q1 2007–Q3 2016 

DIF Balance DIF Reserve Ratio 

($ Billions) (Percent of Insured Deposits) 

Pre-Crisis DIF Reserve Ratio DIF Balance 

85 Crisis Post-Crisis 

Q2 2016: Reserve ratio 

surpasses 1.15 

Q2 2008: DIF balance dips 

to $45.2B; RR falls to 1.01 

and triggers Restoration 

Plan requirement 

Q3 2008: IndyMac fails 

Q4 2008: FDIC adopts DIF 

Restoration Plan 

Q1 2009: 7 basis point 

increase in assessment 

rates 

Q2 2009: New pricing 

adjustments for certain 

liabilities; special 

assessment of $5.5B 

Q3 2009: DIF balance 

and RR go negative 

Q4 2009: $45.7B 

prepaid assessment 

Q1 2007: 2007 DRR is set 

at 1.25; with new FDIRA 

authority, FDIC charges 

assessments to all banks 

Q2 2011: New assessment base 

and large-bank pricing rule 

Q4 2010: FDIC Board 

sets 2.0 DRR for 2011 Q3 2016: Lower assessment rates, 

large bank surcharge, and new 

Q3 2010: Dodd-Frank enacted small bank pricing method

1.5 

75 

65 

55 1.0 

45 

35 

0.5 

25 

15 

5 

0.0 

-5 

-15 

-25 -0.5 

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Fund Management: Attempting to Maintain a Positive Fund Balance 

The reserve ratio’s decline below 1.15 percent in the second quarter of 2008 triggered a 

requirement under FDIRA that the FDIC adopt a restoration plan to restore the reserve 

ratio to 1.15 percent within five years. (Under “extraordinary circumstances,” the FDIC 

Board was allowed to extend the restoration period beyond five years.)11 During the second 

half of 2008, estimated losses from actual failures and reserves set aside for anticipated 

failures increased, and the fund balance and reserve ratio continued to decline. 

In October 2008, the FDIC finalized a restoration plan under which assessment 

rates would be increased to raise the fund balance and the reserve ratio.12 In the same 

month, pursuant to the plan, the FDIC proposed a rate increase of 7 basis points for 

all banks, and the increased rates became effective in the first quarter of 2009.13 (See 

Table 5.A.1.) In February 2009, given the enormous stresses on financial institutions 

and the likelihood of a prolonged and severe economic recession, the FDIC extended 

11 12 U.S.C. § 1817(b)(3)(E). 

12 73 Fed. Reg. 61598 (Oct. 16, 2008). 

13 73 Fed. Reg. 78155 (Dec. 22, 2008). 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 157 

the time frame of the restoration plan from five years to seven, as FDIRA permitted 

under extraordinary circumstances. 

In 2009, with bank failures accelerating, the FDIC took a series of additional actions 

designed to keep the DIF balance positive and increase the DIF’s liquidity. (Attempts 

to keep the DIF balance positive are discussed in this section; increasing the fund’s 

liquidity, in the next section.) In an attempt to maintain a positive fund balance, the 

agency imposed a one-time special assessment. The agency was concerned that a fund 

balance and reserve ratio near or below zero might create public confusion about the 

FDIC’s ability to move quickly to resolve problem institutions and protect insured 

depositors. The FDIC’s statutory authority permitted it to borrow from the Treasury,14 

which it had done in the early 1990s during the bank and thrift crisis, but in 2009 it 

elected not to. Its borrowing in the early 1990s had been from the Treasury’s Federal 

Financing Bank (FFB), and the purpose had been to obtain working capital.15 Borrowing 

from the Treasury, however, while ensuring that sufficient liquid funds are available to 

resolve failing banks quickly, does not shore up the fund balance (the net worth of the 

DIF) and the reserve ratio. In addition, the FDIC viewed its line of credit at the Treasury 

not as a source of financing for projected losses but as a means of covering unforeseen 

losses.16 In contrast to borrowing from the Treasury, a special assessment would increase 

the fund balance by raising revenue. 

14 The FDIC may borrow from the Treasury under two statutory provisions. First, the FDIC has statutory 

authority to borrow on an interest-bearing basis from the Treasury, with the Secretary’s approval. In 2009, 

Congress permanently increased the maximum amount of borrowing under this authority from $30 billion 

to $100 billion, and temporarily increased it to $500 billion through 2010. (Amounts borrowed under this 

authority in excess of the $100 billion permanent maximum required the concurrence of the FDIC Board, 

the Federal Reserve Board, and the Secretary of the Treasury in consultation with the President.) The 

enabling legislation was the Helping Families Save Their Homes Act of 2009, Pub. L. 111-22, §204(b), 123 

Stat. 1632 (2009). The industry is required to repay any borrowings under this authority through assessments 

(which can include special assessments) pursuant to a repayment schedule agreed to by the Secretary of the 

Treasury and the FDIC Board after consultation with the Financial Services Committee of the House of 

Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. 12 U.S.C. § 

1824(a). In addition to this borrowing line from the Treasury, the FDIC may also borrow from the Treasury 

Department’s Federal Financing Bank (FFB), subject to a “maximum obligation limitation” that depends in 

part on the value of DIF assets. 12 U.S.C. §§1824(b) and 1825(c). 

15 12 U.S.C. § 1824(b). On January 8, 1991, the FDIC and the FFB entered into a Note Purchase Agreement, 

renewable annually, permitting the FDIC to borrow. The FDIC first borrowed under the agreement 

on June 30, 1991. The date of the peak amount outstanding on the debt ($15 billion) was June 15, 1992. 

FDIC, 1993 Annual Report, p. 1. The debt was repaid in full on August 6, 1993. In addition, the Resolution 

Trust Corporation borrowed from the FFB for working capital; the maximum amount borrowed was 

$63 billion, and the amount was repaid in full in 1998. Resolution Trust Corporation (U.S.), Office of 

Planning, Research, and Statistics, Statistical Abstract: August 1989/September 1995 (Washington, DC, 

1995), 64, https://fraser.stlouisfed.org/scribd/?title_id=851&filepath=/files/docs/publications/statabsrtc/ 

statabs_rtc_1989-1995.pdf. 

16 For a more detailed discussion of resolutions, losses, and cash management, see chapter 6. 
158 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

In June 2009, therefore, the FDIC imposed a $5.5 billion special assessment that 

was collected on September 30, 2009.17 (The final rule had been adopted in May.) In 

addition, the FDIC reserved the authority to impose a second special assessment if the 

DIF was later projected to fall to a level that the Corporation believed would adversely 

affect public confidence or if the fund was close to or below zero. (The second special 

assessment could equal up to 5 basis points on each bank’s assets minus Tier 1 capital.) 

In the meantime, in May 2009 Congress had amended the statute governing the 

establishment and implementation of the restoration plan and now allowed the FDIC 

up to eight years to return the DIF reserve ratio to 1.15 percent (although, as before the 

amendment, the period could be extended because of extraordinary circumstances).18 

Following up on Congress’s action, in September 2009 the FDIC amended the restoration 

plan, extending the period to return the reserve ratio to 1.15 percent to eight years.19 

In the amended plan, the FDIC stated that it would not impose the additional special 

assessments that had been allowed under the May 2009 final rule imposing the special 

assessment. The FDIC planned to maintain assessment rates at their existing levels 

through the end of 2010 and, to ensure that the fund would return to 1.15 percent within 

eight years from when it fell below that threshold (i.e., by 2016), the Corporation adopted 

a uniform 3 basis point increase in assessment rates effective January 1, 2011. 

The special assessment did not achieve its objective of maintaining a positive fund 

balance. In fact, the DIF balance fell below zero at the end of the next quarter (the third 

quarter of 2009). The fund ended the year with a negative $20.9 billion balance and 

remained negative for a total of seven quarters. (Since then, however, the DIF has grown 

every quarter [see Figure 5.1] and became positive in the second quarter of 2011.) 

17 The special assessment equaled 5 basis points of each bank’s assets minus Tier 1 capital as of June 30, 2009, 

but was capped at 10 basis points of a bank’s second quarter 2009 regular assessment base. At that time, banks’ 

regular assessment bases were approximately equal to their domestic deposits. The FDIC initially adopted an 

interim rule imposing a special assessment of 20 basis points of each bank’s regular assessment base, but in 

the final rule, in response to comments on the interim rule, the Corporation revised the assessment base for 

the special assessment so as to “better balance... the burden of the special assessment.” 74 Fed. Reg. 25639, 

25641 (May 29, 2009). The revised assessment base meant that large banks, which tend to rely proportionally 

less on domestic deposits than do small banks, paid a larger share of the special assessment than they would 

have under the special assessment as originally proposed. 

Two developments enabled the FDIC to reduce the size of the special assessment. First, funds collected 

and expected to be collected from a surcharge on senior unsecured debt guaranteed under the Temporary 

Liquidity Guarantee Program (see chapter 2) provided additional resources to the FDIC. Second, between 

the adoption of the interim rule and the adoption of the final rule, Congress acted on the FDIC’s request 

to increase the FDIC’s authority to borrow from the Treasury (see footnote 14). The increase in the FDIC’s 

borrowing authority gave the Corporation a larger cushion against unforeseen bank failures. 

18 12 U.S.C. §1817(b)(3)(E), as amended by the Helping Families Save Their Homes Act of 2009, Pub. L. No. 

111-22, §204(b), 123 Stat. 1649 (2009). 

19 74 Fed. Reg. 51062 (Oct. 2, 2009). 
 

 

 

 

 

 

CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 159 

Fund Management: Increasing Fund Liquidity 

The DIF’s negative balance itself did not mean that the fund lacked the liquid assets 

necessary to quickly resolve failing banks and pay insured depositors. The fund balance, 

or net worth, equals the fund’s assets minus its liabilities. Among the assets are cash and 

Treasury securities, which are liquid assets that enable the FDIC to promptly resolve failing 

banks and protect insured depositors. Among the DIF’s liabilities is the contingent loss 

reserve. The negative fund balance at the end of the third quarter 2009 resulted from the 

increase in the contingent loss reserve as expected failures rose sharply, from $24 billion at 

the end of 2008 to a peak of $44 billion at the end of 2009. (Figure 5.2 charts the contingent 

loss reserve, portfolio liquidity, and fund balance for the years 2007 through 2010.) 

Figure 5.2. Contingent Loss Reserve, DIF Portfolio Liquidity, and DIF Balance, 

Q1 2007–Q4 2010 

-30 

-10 

10 

30 

50 

70 

90 

110 

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 

Billions of Dollars Contingent Loss Reserve DIF Balance DIF Portfolio Liquidity 

Q2 2008: DIF balance dips 

to $45.2B primarily because 

of a $10B increase in the 

contingent loss reserve 

Q4 2009: $45.7B prepaid 

assessment strengthens 

DIF liquidity 

Q2 2009: Special assessment of 

$5.5B was imposed in an attempt 

to keep the DIF balance positive 

Even though an increase in the contingent loss reserve lowers the fund balance, it does 

not reduce the liquid assets of the fund unless and until the liabilities are paid. As expected 

failures materialized throughout 2009, however, the DIF’s liquid assets declined sharply. As 

of June 30, 2009, the DIF’s liquid assets had fallen to a little under $30 billion from slightly 

over $53 billion one year earlier. In September 2009, the FDIC projected that liquidity 

needs would exceed liquid assets beginning in the first quarter of 2010 and, furthermore, 

that liquidity needs could significantly exceed liquid assets through 2010 and 2011.20 If 

20 FDIC, “Memorandum to the FDIC Board of Directors: Special Assessment, Restoration Plan and Proposal 
160 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

not addressed, this potential squeeze on the liquid assets of the DIF threatened the FDIC’s 

ability to pay depositors promptly. 

To strengthen the DIF’s liquidity, the FDIC adopted a novel approach. In November 

2009, the FDIC required the banking industry to prepay their quarterly assessments for 

the fourth quarter of 2009 and for all of 2010, 2011, and 2012.21 On December 30, 2009, 

the FDIC collected $45.7 billion of prepaid assessments, which boosted the fund’s liquidity 

significantly (as Figure 5.2 illustrates).22 

The FDIC chose to require prepayment of assessments rather than imposing additional 

special assessments for two main reasons. First, the FDIC wanted to avoid increasing 

assessments when bank earnings and capital were already under stress. In the second 

quarter of 2009, when the special assessment was charged, FDIC-insured commercial 

banks and savings institutions reported an aggregate net loss of $3.7 billion.23 In contrast 

to a special assessment, which immediately affects a bank’s earnings and capital, a 

prepaid assessment does not. Banks book a prepayment as an asset (prepaid expense) 

with a zero percent risk weight (meaning that the asset will not affect a bank’s riskbased capital levels), and they expense it as they are charged their quarterly assessments. 

Industry trade groups such as the Independent Community Bankers Association and 

the American Bankers Association supported the prepaid assessment, the American 

Bankers Association stating that the assessment “strike[s] the right balance at this time 

to assure that the FDIC has the cash necessary to meet its obligations without impairing 

banks’ ability to meet their obligations to their communities.”24 

The second reason for preferring prepayment to additional special assessments was 

to avoid discouraging the extension of credit. When the prepayment was collected in 

December 2009, bank lending was already on the decline,25 and throughout 2009 public 

scrutiny had focused on banks’ ability and willingness to lend to consumers; in addition, 

government assistance programs that focused specifically on lending were underway. The 

Corporation, knowing that banks were holding significant amounts of cash in response 

to the freeze in short-term lending markets in the fall of 2008, believed that most of the 

for Maintaining Fund Liquidity,” September 28, 2009, https://www.fdic.gov/news/board/Sept29no1.pdf. 

21 74 Fed. Reg. 59056 (Nov. 17, 2009). 

22 FDIC, 2009 Annual Report, 20. 

23 FDIC, Quarterly Banking Profile, June 30, 2009, https://www5-qa.fdic.gov/qbp/2009jun/qbp.pdf. 

24 American Bankers Association, Comment letter on proposed rulemaking on prepaid assessments, 75 Fed. 

Reg. 51063 (Oct. 2, 2009), Oct. 28, 2009, https://www.fdic.gov/regulations/laws/federal/2009/09c109ad49. 

pdf; see also, Independent Community Bankers of America, Comment letter on proposed rulemaking on 

prepaid assessments, 74 Fed. Reg. 51063 (Oct. 2, 2009), Oct. 27, 2009, https://www.fdic.gov/regulations/ 

laws/federal/2009/09c82ad49.pdf. 

25 The banking industry’s ratio of total loans and leases to total assets had declined from a peak of 61.8 percent 

at the end of 2005 to 55.6 percent at the end of 2009. The ratio continued to trend downward and reached a 

low of 53.0 percent at the end of March 2015. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 161 

prepaid assessments would be drawn from banks’ available cash and excess reserves at 

the Federal Reserve without significantly affecting banks’ lending activities. And in fact, 

by the end of 2009—even after the prepayment of assessments—banks on average had 

a much higher ratio of cash and balances due from other depository institutions to total 

assets than they did before the crisis. (Cash and balances due from other depository 

institutions include excess balances at the Federal Reserve.) On average, the ratio of cash 

and balances due from other depository institutions to total assets at the end of 2009 

was 8.0 percent, which was considerably higher than the 5.0 percent average from 2003 

through 2007. (The ratio continued to remain considerably higher during the rest of the 

banking crisis and beyond.) 

Just as the FDIC had opted not to borrow from the Treasury earlier in 2009 to 

strengthen the fund balance and the reserve ratio, the FDIC decided in late 2009 not 

to borrow from the Treasury to increase fund liquidity. One reason the FDIC turned 

to prepaid assessments was that prepaid assessments ensured that the DIF remained 

directly industry funded, whereas borrowing from the Treasury would not. Another 

reason was that, unlike the prepaid assessments, borrowings from the Treasury would 

bear interest, which the banking industry would have had to pay eventually through 

higher assessments. 

In the end, the FDIC was successful in maintaining sufficient DIF liquidity throughout 

the crisis. After the prepaid assessment was collected at the end of 2009, liquid assets (as 

measured at month-end) never fell below $34 billion. (This month-end low was reached 

on August 31, 2013.) The prepaid assessment was buttressed by the use of loss-sharing 

agreements to resolve most failed banks, and these agreements greatly reduced the 

Corporation’s cash outflows. (Loss-sharing agreements are discussed in detail in chapter 6.) 

Adjusting Risk-Based Assessments 

Effective the second quarter of 2009, the FDIC made several major changes to risk-based 

pricing and also adjusted assessment rates to reflect these changes (see Table 5.A.2).26 

First, to make assessment rates more accurately reflect the risk that banks posed to the 

fund, the FDIC widened the range of assessment rates applicable to Risk Category I from 

a 2 basis point spread to a 4 basis point spread. 

Second, the FDIC introduced three possible adjustments to a bank’s assessment rate: 

the secured liability adjustment, the brokered deposit adjustment, and the unsecured 

debt adjustment.27 These adjustments were intended to account both for liabilities that 

would increase the loss to the fund when a bank failed (secured liabilities and brokered 

deposits) and for liabilities that would reduce the loss (unsecured debt). The secured 

liability adjustment increased assessment rates for banks that held large amounts of 

26 74 Fed. Reg. 9525 (Mar. 4, 2009). 

27 Ibid. 
162 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

secured debt. When a bank fails, secured debt reduces the assets available to repay 

the FDIC for its outlays to protect insured deposits. At that time, however, secured 

debt was not part of the assessment base, so banks paid no more in assessments for 

issuing debt that would increase the DIF’s losses if the bank were to fail.28 The brokered 

deposit adjustment increased assessment rates for riskier banks that held large amounts 

of brokered deposits relative to their total domestic deposits, since brokered deposits 

tend to increase both a bank’s probability of failure and the DIF’s losses when a bank 

does fail.29 (For the least risky banks, those in Risk Category I, the FDIC added a new 

ratio to the financial ratios used to determine assessment rates. The new ratio increased 

assessment rates for banks that used relatively large amounts of brokered deposits to 

fund rapid asset growth.)30 The unsecured debt adjustment lowered assessment rates for 

banks with long-term, unsecured debt, since unsecured debt tends to reduce the DIF’s 

losses when a bank fails.31 

Finally, the FDIC revised the assessment methodology for large banks in Risk 

Category I so that assessment rates were based not only on CAMELS component 

ratings and long-term-debt issuer ratings (as they had been since the beginning of 

2007), but also on the same financial ratios that applied to small banks. This change, 

like the other two, was meant to make assessment rates reflect risk more accurately, but 

had another purpose as well: to have rates respond to changing risk profiles sooner, 

since the methodology being replaced (using only CAMELS component ratings and 

long-term-debt issuer ratings) had often not fully reflected large banks’ deteriorating 

conditions quickly enough. 

28 The secured liability adjustment was eliminated in 2011 when the assessment base was broadened to average 

consolidated total assets minus average tangible equity. The new assessment base encompasses all liabilities— 

including secured debt. The change in base is discussed in detail below in the section “Reallocating the Costs 

of Supporting the DIF between Small and Large Banks.” 

29 Beginning with the third quarter of 2016 the FDIC revised the treatment of brokered deposits in the riskbased pricing method applicable to an established small bank (generally, a bank with less than $10 billion in 

total assets that has been federally insured for at least five years) so that holding large amounts of brokered 

deposits relative to assets can directly increase the assessment rate of any established small bank. 

30 The ratio applicable to Risk Category I banks excluded reciprocal deposits. Reciprocal deposits are deposits 

that a bank receives through a deposit placement network on a reciprocal basis, such that (1) for any deposit 

received, the institution (as agent for depositors) places the same amount with other banks through the 

network; and (2) each member of the network sets the interest rate to be paid on the entire amount of funds 

it places with other network members. 

31 When an institution fails, holders of unsecured claims, including subordinated debt, do not receive 

distributions from the receivership estate unless and until all secured claims, administrative claims, and 

deposit claims have been paid in full. Consequently, greater amounts of long-term unsecured claims provide 

a cushion that can reduce the FDIC’s loss in the event of failure. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 163 

Reforms to Fund Management and Risk-Based Pricing, 2010–2016 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 

21, 2010, contained several provisions designed to strengthen the DIF. In the years 

since the law’s enactment, the FDIC has drawn on the authorities in these provisions to 

develop a comprehensive, long-term fund management plan. In addition to provisions 

strengthening the DIF, Dodd-Frank also included provisions designed to reallocate the 

costs of supporting the fund between large and small banks, and these provisions, too, 

the FDIC has implemented.32 Finally, and independent of Dodd-Frank, the FDIC has 

updated its risk-based pricing methods for small and large banks, incorporating data and 

experience from the banking crisis to better estimate the risks that banks pose to the DIF. 

Strengthening the DIF: The Long-Term Fund Management Plan 

To strengthen the DIF, Dodd-Frank raised the minimum DRR from 1.15 percent to 1.35 

percent and required that the reserve ratio reach this new minimum by September 30, 

2020. Dodd-Frank also eliminated the upper limit on the reserve ratio (and therefore on 

the size of the fund), and it eliminated the requirement that the FDIC pay dividends to 

banks when the reserve ratio is between 1.35 and 1.50 percent. And when the reserve 

ratio exceeds 1.50 percent, the FDIC has sole discretion in determining whether to 

suspend or limit dividends. 

The FDIC took advantage of Dodd-Frank’s grant of greater authority to manage the 

fund by developing a comprehensive, long-term DIF management plan in 2010. The 

plan is designed to reduce procyclical volatility in the assessment system and keep 

assessment rates moderate and steady throughout economic and credit cycles, while 

also maintaining a positive fund balance even during a banking crisis. In developing the 

plan, the FDIC sought industry input and, in addition, undertook a historical analysis to 

determine the reserve ratio that would have been required to maintain both a positive 

balance and stable assessment rates from 1950 through 2010. 

To get industry input, the FDIC organized a roundtable that was held September 

24, 2010. At the roundtable, bank executives and industry trade group representatives 

uniformly favored steady, predictable assessments and objected to high assessment 

rates during crises.33 

Using historical DIF losses and simulated income data on DIF investments from 

1950 through 2010, the analysis in the FDIC’s historical study varied assessment rates 

and dividends paid from the DIF to banks to determine what would have happened 

to a simulated fund balance and reserve ratio during the same period. The study 

concluded that moderate, long-term industry average assessment rates, combined with 

32 Pub. L. 111-203, 331-334, 124 Stat. 1376, 1539 (12 U.S.C. §§ 1813(y)(3), and 1817(a)(2)(B), (b)(1)(E), (b)(2), 

(b)(3)(B), (b)(3)(E)(ii) and (note)). 

33 76 Fed. Reg. 79286 (Dec. 20, 2010). 76 Fed. Reg. 10672, 10,683 (Feb. 25, 2011). 
164 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

an appropriate dividend or an appropriate assessment rate reduction policy, would have 

sufficed to prevent the fund from becoming negative during the two banking crises that 

occurred during the 60-year period covered by the analysis—but only if the reserve ratio 

had exceeded 2.0 percent before the onset of each crisis.34 

To increase the probability that the reserve ratio would reach a level sufficient to 

withstand a future crisis, the FDIC Board set the DRR for 2011 at 2.0 percent, consistent 

with the FDIC’s historical analysis.35 The FDIC Board has voted annually since then to 

maintain the 2.0 percent DRR, viewing it as the minimum level needed to withstand 

future crises of the magnitude of past crises and as a long-term goal. 

In another provision of the long-term DIF management plan and consistent with the 

authority granted under Dodd-Frank, the FDIC suspended dividends indefinitely (FDIRA 

had required that dividends be returned to the industry when the fund reserve ratio exceeds 

1.5 percent). Instead, consistent with the historical analysis, the plan prescribed (and the 

FDIC Board adopted) assessment rates that become progressively lower when the reserve 

ratio exceeds 1.15, 2.0, and 2.5 percent (see Tables 5.A.4, 5.A.5, and 5.A.6). 

In addition, consistent with Dodd-Frank’s requirement that the reserve ratio reach the 

new minimum level of 1.35 percent by that date, the FDIC extended the termination of 

the restoration plan from the end of 2016 to September 30, 2020.36 

Reallocating the Costs of Supporting the DIF between Small and Large Banks 

Other provisions of Dodd-Frank, as noted above, aimed to reallocate the costs of 

supporting the deposit insurance fund between small and large banks. The reallocation 

required the FDIC to amend its regulations in two ways. 

First, seeking to ensure that, in the aggregate, large and small banks’ shares of 

assessments were proportionate to their shares of industry assets, Dodd-Frank required 

the FDIC to amend its regulations to redefine the assessment base by broadening it 

from domestic deposits to average consolidated total assets minus average tangible 

equity. Since a bank’s assessment is the product of its assessment rate and its assessment 

base, changing the assessment base changes a bank’s assessment, all else equal. The new 

assessment base became effective April 1, 2011.37 The rule also adjusted risk-based rates 

34 75 Fed. Reg. 66272 (Oct. 27, 2010); 76 Fed. Reg. 79286 (Dec. 20, 2010); 76 Fed. Reg. 10672, 10674 (Feb. 25, 

2011). For more on the historical analysis, see Lee K. Davison and Ashley M. Carreon, “Toward a Long-Term 

Strategy for Deposit Insurance Fund Management,” FDIC Quarterly 4, no. 4 (2010), https://www.fdic.gov/ 

bank/analytical/quarterly/2010-vol4-4/fdic-quarterly-v4n4-fundmgmt-121610.pdf. 

35 75 Fed. Reg. 79286 (Dec. 20, 2010). 

36 75 Fed. Reg. 66293 (Oct. 27, 2010). Given the continuing stresses on the earnings of insured depository 

institutions and the additional time allowed for reaching the minimum reserve ratio, the FDIC decided 

to forego the uniform 3 basis point increase in initial assessment rates that, pursuant to the amended plan 

adopted in September 2009, had been scheduled to take effect on January 1, 2011. 

37 76 Fed. Reg. 10672 (Feb. 28, 2011). As permitted by statute, the assessment base for banker’s banks and 

custodial banks is subject to reductions not applicable to other banks. The rule also eliminated the secured 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 165 

to raise approximately the same aggregate amount of revenue on the new assessment 

base as would have been raised on the old base. (See Table 5.A.3.) While aggregate 

assessments remained unchanged, the proportion of total industry assessments paid by 

small banks decreased and the proportion paid by large banks increased, consistent with 

congressional intent. Before the change in the assessment base, banks with less than $10 

billion in assets held approximately 20 percent of industry assets, yet paid approximately 

30 percent of total assessments; after the change, small banks paid approximately 20 

percent of total assessments, consistent with their share of industry assets. 

Second, when Dodd-Frank raised the minimum reserve ratio from 1.15 percent to 

1.35 percent and required that the reserve ratio reach this new minimum by September 

30, 2020, it also directed the FDIC, when setting assessments, to offset the effect on small 

banks of the increase in the minimum reserve ratio. Therefore, to raise the reserve ratio to 

1.35 percent by the statutory deadline and offset the effect of the increase on small banks, 

the FDIC approved a final rule in March 2016 imposing quarterly surcharges on large 

banks.38 Surcharges began in the third quarter of 2016 (the quarter after the reserve ratio 

exceeded the previous minimum target of 1.15 percent) and will last until the quarter in 

which the reserve ratio reaches or exceeds 1.35 percent. The surcharges will not, however, 

extend past December 31, 2018. If the reserve ratio has not reached 1.35 percent by that 

date, banks with $10 billion or more in assets will be assessed a shortfall assessment on 

March 31, 2019. In addition, small banks will receive assessment credits for the portion 

of their regular assessments that contributed to growth in the reserve ratio between 1.15 

percent and 1.35 percent. When the reserve ratio is 1.38 percent or higher, the FDIC will 

apply these credits to offset small banks’ regular quarterly assessments. 

Updating Risk-Based Pricing Using Data and Experience from the Crisis 

Independent of Dodd-Frank, the FDIC has revised its pricing methodologies for both 

small and large banks, including highly complex banks.39 Before the revisions, pricing 

methodologies had relied on data from the previous banking crisis (the bank and thrift 

crisis of the late 1980s and early 1990s). The large number of failures during the recent 

banking crisis gave the FDIC a wealth of new data on the characteristics of banks that 

failed. With the new data and fresh experience, the Corporation was able to update its 

pricing methodologies to better estimate the risks that banks pose to the DIF. 

liability adjustment (secured debt was included in the new assessment base and an adjustment was no longer 

necessary). 

38 81 Fed. Reg. 32180 (May 20, 2016). The surcharges equal an annual rate of 4.5 basis points; they are applied 

to a large bank’s assessment base that has certain adjustments made to it. The base for the surcharge is the 

bank’s regular assessment base reduced by $10 billion, and adjusted for affiliated banks. 

39 76 Fed. Reg. 10672 (Feb. 28, 2011). Generally, a highly complex bank is defined as (a) a large bank with at 

least $50 billion of total assets that is controlled by a U.S. parent with at least $500 billion in assets, or (b) a 

processing bank or a trust company with fiduciary assets of at least $500 billion. 12 CFR § 327.8(g). 
166 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Large Banks and Highly Complex Institutions 

The final rule that revised the assessment base effective April 1, 2011, also revised the 

pricing methodology for large banks and highly complex institutions.40 The changes 

made to the large-bank methodology were meant to do three things: (1) capture risk 

closer to the time a bank assumes the risk, (2) better differentiate risks posed by banks 

during good economic and banking conditions based on how the banks would fare 

during periods of stress or economic downturn, and (3) account more accurately for the 

losses the FDIC might incur if a large bank fails. 

Under the revised large-bank pricing methodology, the FDIC uses two scorecards, 

one for the majority of large banks and a second for highly complex institutions. 

Both scorecards use banks’ CAMELS component ratings and financial measures to 

determine a performance score and a loss severity score. Together, these scores predict 

the performance of banks during periods of stress and are used to determine a bank’s 

assessment rate.41 (See Tables 5.A.3 and 5.A.4.) The two scorecards are similar, but the 

scorecard for highly complex institutions uses some financial measures intended to 

reflect the more complex activities of these institutions. Risk categories were eliminated 

in the revised large-bank pricing methodology.42 To compare the revised methodology 

with the one it replaced, the FDIC analyzed how well the new measures would have 

predicted a rank ordering of large banks based on the risk they posed as of the end of 

2009. (The rank ordering was based on an expert valuation of relative risk by the FDIC.) 

The FDIC found that the measures in the revised methodology would have performed 

significantly better than the method it replaced. 

Established Small Institutions 

A revised pricing methodology for established small banks became effective in the third 

quarter of 2016, which was the same quarter that lower assessment rates adopted by the 

FDIC Board in 2011 went into effect and also the quarter after the reserve ratio first 

40 In this rulemaking, the FDIC also created a depository institution debt adjustment (DIDA). The DIDA 

increases a bank’s assessment rate when the bank holds long-term unsecured debt issued by another insured 

depository institution. 

41 Some of the definitions used in the large-bank and highly complex institution pricing methodologies were 

amended in 2012 and 2014. The 2014 revisions also contained other changes to assessment rules applicable 

to large and small banks; these changes were designed to conform to regulatory changes in capital rules 

adopted pursuant to Basel III (an international set of capital standards that are implemented by domestic 

banking regulators). See 77 Fed. Reg. 66000 (Oct. 31, 2012) and 79 Fed. Reg. 70427 (Nov. 26, 2014). 

42 In addition, long-term-debt-issuer ratings were no longer used. Dodd-Frank explicitly required all federal 

agencies to review and modify regulations in order to remove reliance on credit ratings and substitute an 

alternative standard of creditworthiness. Pub. L. 111-203, § 939A, 124 Stat. 1376, 1886 (codified at 15 U.S.C. 

78o-7 note). Even before Dodd-Frank was enacted, however, the FDIC had proposed removing long-termdebt issuer ratings from its assessment calculations. 75 Fed. Reg. 23516, 23517 (May 3, 2010). 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 167 

returned to 1.15 percent.43 (See Table 5.A.4.) (An established small bank is generally 

defined as a bank that has been federally insured for at least five years and has less than 

$10 billion in total assets.)44 The new methodology draws on data from the two most 

recent banking crises and the years between them. The underlying model uses financial 

ratios and CAMELS component ratings to estimate the probability of failure over three 

years. The new methodology uses the results of the underlying model to determine 

assessment rates, and uses CAMELS composite ratings (rather than risk categories, as 

in the methodology being replaced) to place limits on the assessment rates that banks 

can be charged. The FDIC’s backtesting revealed that the new methodology would 

have differentiated between banks that later failed and those that did not better than 

the methodology being replaced, and would have differentiated significantly better both 

immediately before and at the beginning of the crisis. 

The change in the pricing methodology for established small institutions was designed 

to be revenue neutral (that is, to raise approximately the same aggregate amount of revenue 

from small banks as would have been collected under the pricing methodology it replaced). 

Conclusion 

When the banking crisis began in 2008, the FDIC’s deposit insurance fund lacked 

sufficient capital to withstand the losses that stemmed from that crisis. Although 

legislative reforms in 2006 had given the FDIC somewhat greater authority than it had 

had for the previous decade to manage the fund and to price for risk, the reforms came 

too late to allow the Corporation to build up the DIF before the crisis struck. 

Dodd-Frank in 2010 gave the FDIC more authority to manage the DIF and to price 

deposit insurance for risk than the Corporation ever had, and the FDIC has used this 

authority to substantially revise its approach both to fund management and to risk-based 

pricing. The FDIC has developed a comprehensive, long-term DIF management plan 

designed to reduce procyclical volatility in the assessment system and keep assessment 

rates moderate and steady throughout economic and credit cycles, while also maintaining 

a positive fund balance even during a banking crisis. Based on a historical analysis of fund 

losses over a 60-year period, the FDIC has set a long-term fund reserve ratio target of 2.0 

percent, since that level, combined with steady assessment rates, would have sufficed to 

prevent the fund from becoming negative during the last two banking crises. The FDIC 

also relied on this analysis to adopt moderate overall assessment rates that are intended 

to remain in place even during a downturn. 

43 81 Fed. Reg. 16059 (Mar. 25, 2016). 

44 12 CFR § 327.8(e), (k). 
168 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Using statistical techniques, the FDIC has also incorporated large amounts of failure 

data from the recent banking crisis into its risk-based pricing methodologies for small 

banks and for large and highly complex banks. These new methodologies are able to 

better distinguish between banks that are likely to survive a downturn and those that are 

not, consistent with the goals of a risk-based pricing system. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 169 

Appendix 

Evolution of the Assessment Rate Schedules, Q1 2009 to Present 

To calculate a bank’s quarterly deposit insurance assessment, the bank’s assessment rate 

is multiplied by its assessment base. All rates below are annual and are in basis points, 

which are cents per $100 of the assessment base. 

Table 5.A.1. Assessment Rate Schedule, Q1 2009 

Risk Categorya 

I II III IV 

Base Assessment Rate 12 to 14 17 35 50 

Note: Assessment base is approximately equal to domestic deposits. 

a Risk Category I comprises banks that pose the least risk, and each successively higher risk category 

comprises banks that pose increasingly higher risk. 

Table 5.A.2. Assessment Rate Schedule, Q2 2009–Q1 2011 

Risk Categorya 

I II III IV 

Initial Base Assessment Rate 12 to 16 22 32 45 

Unsecured Debt Adjustment –5 to 0 –5 to 0 –5 to 0 –5 to 0 

Secured Debt Adjustment 0 to 8 0 to 11 0 to 16 0 to 22.5 

Brokered Deposit Adjustment N/A 0 to 10 0 to 10 0 to 10 

Total Base Assessment Rate 7 to 24 17 to 43 27 to 58 40 to 77.5 

Note: Assessment base is approximately equal to domestic deposits. 

a Risk Category I comprises banks that pose the least risk, and each successively higher risk category 

comprises banks that pose increasingly higher risk. 
170 

c 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Table 5.A.3. Assessment Rate Schedule, Q2 2011–Q2 2016 

Small-Bank Risk Categorya Large & Highly 

Complex 

Institutions I II III IV 

Initial Base Assessment Rate 5 to 9 14 23 35 5 to 35 

Unsecured Debt Adjustmentb –4.5 to 0 –5 to 0 –5 to 0 –5 to 0 –5 to 0 

Brokered Deposit Adjustment N/A 0 to 10 0 to 10 0 to 10 0 to 10 

Total Base Assessment Ratec 2.5 to 9 9 to 24 18 to 33 30 to 45 2.5 to 45 

Note: Assessment base equals average consolidated total assets minus average tangible equity, with additional 

reductions for custodial banks and banker’s banks. 

a Risk Category I comprises banks that pose the least risk, and each successively higher risk category 

comprises banks that pose increasingly higher risk. 

b The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured 

institution’s initial base assessment rate; thus, for example, an insured depository institution with an initial 

base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5 basis points 

and cannot have a total base assessment rate lower than 2.5 basis points. 

Total base assessment rates do not include the depository institution debt adjustment. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 171 

Table 5.A.4. Assessment Rate Schedule, Q3 2016 to Present 

(After the reserve ratio reaches 1.15 percent but is less than 2.0 percent) 

Established Small Banks Large & 

Highly 

Complex 

Institutions 

CAMELS Composite 

1 or 2 3 4 or 5 

Initial Base Assessment Rate 3 to 16 6 to 30 16 to 30 3 to 30 

Unsecured Debt Adjustmenta –5 to 0 –5 to 0 –5 to 0 –5 to 0 

Brokered Deposit Adjustment N/A N/A N/A 0 to 10 

Total Base Assessment Rateb 1.5 to 16 3 to 30 11 to 30 1.5 to 40 

Note: Assessment base equals average consolidated total assets minus average tangible equity, with additional 

reductions for custodial banks and banker’s banks. 

a The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured 

institution’s initial base assessment rate; thus, for example, an insured depository institution with an initial 

base assessment rate of 3 basis points will have a maximum unsecured debt adjustment of 1.5 basis points 

and cannot have a total base assessment rate lower than 1.5 basis points. 

b Total base assessment rates do not include the depository institution debt adjustment. 
172 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Table 5.A.5. Assessment Rate Schedule 

(After the reserve ratio reaches 2.0 percent but is less than 2.5 percent) 

Established Small Banks Large & 

Highly 

Complex 

Institutions 

CAMELS Composite 

1 or 2 3 4 or 5 

Initial Base Assessment Rate 2 to 14 5 to 28 14 to 28 2 to 28 

Unsecured Debt Adjustmenta –5 to 0 –5 to 0 –5 to 0 –5 to 0 

Brokered Deposit Adjustment N/A N/A N/A 0 to 10 

Total Base Assessment Rateb 1 to 14 2.5 to 28 9 to 28 1 to 38 

Note: Assessment base equals average consolidated total assets minus average tangible equity, with additional 

reductions for custodial banks and banker’s banks. 

a The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured 

institution’s initial base assessment rate; thus, for example, an insured depository institution with an initial 

base assessment rate of 2 basis points will have a maximum unsecured debt adjustment of 1 basis point 

and cannot have a total base assessment rate lower than 1 basis point. 

b Total base assessment rates do not include the depository institution debt adjustment. 
CHAPTER 5: Deposit Insurance: Fund Management and Risk-Based Deposit Insurance Assessments 173 

Table 5.A.6. Assessment Rate Schedule 

(After the reserve ratio reaches 2.5 percent) 

Established Small Banks Large & 

Highly 

Complex 

Institutions 

CAMELS Composite 

1 or 2 3 4 or 5 

Initial Base Assessment Rate 1 to 13 4 to 25 13 to 25 1 to 25 

Unsecured Debt Adjustmenta –5 to 0 –5 to 0 –5 to 0 –5 to 0 

Brokered Deposit Adjustment N/A N/A N/A 0 to 10 

Total Base Assessment Rateb 0.5 to 13 2 to 25 8 to 25 0.5 to 35 

Note: Assessment base equals average consolidated total assets minus average tangible equity, with additional 

reductions for custodial banks and banker’s banks. 

a The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured 

institution’s initial base assessment rate; thus, for example, an insured depository institution with an initial 

base assessment rate of 1 basis point will have a maximum unsecured debt adjustment of 0.5 basis points 

and cannot have a total base assessment rate lower than 0.5 basis points. 

b Total base assessment rates do not include the depository debt adjustment. 
174 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Bibliography 

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assessments. 74 Federal Register 51063, October 2, 2009. October 28, 2009. https://www. 

fdic.gov/regulations/laws/federal/2009/09c109ad49.pdf. 

Davison, Lee K., and Ashley M. Carreon. “Toward a Long-Term Strategy for Deposit 

Insurance Fund Management.” FDIC Quarterly 4, no. 4 (2010): 29–39. https://www.fdic. 

gov/bank/analytical/quarterly/2010-vol4-4/fdic-quarterly-v4n4-fundmgmt-121610.pdf. 

Federal Deposit Insurance Corporation (FDIC). 1993 Annual Report. 1994. https:// 

www.fdic.gov/about/strategic/report/archives/fdic-ar-1993.pdf. 

———. 2009 Annual Report. 2010. https://www.fdic.gov/about/strategic/ 

report/2009annualreport/ar09section1.pdf. 

———. Quarterly Banking Profile, June 30, 2009. https://www5-qa.fdic.gov/ 

qbp/2009jun/qbp.pdf. 

———. “Memorandum to the FDIC Board of Directors: Special Assessment, 

Restoration Plan and Proposal for Maintaining Fund Liquidity.” September 28, 2009. 

https://www.fdic.gov/news/board/Sept29no1.pdf. 

Federal Register. Vols. 71, 73–77, 79, and 81. 2006, 2008–12, 2014, and 2016. 

Independent Community Bankers of America. Comment letter on proposed 

rulemaking on prepaid assessments. 74 Federal Register 51063, October 2, 2009. 

October 27, 2009. https://www.fdic.gov/regulations/laws/federal/2009/09c82ad49.pdf. 

Resolution Trust Corporation (U.S.). Office of Planning, Research, and Statistics. 

(1995). Statistical Abstract: August 1989/September 1995. https://fraser.stlouisfed.org/ 

scribd/?title_id=851&filepath=/files/docs/publications/statabsrtc/statabs_rtc_1989­

1995.pdf. 
6
 

Bank Resolutions and Receiverships 

One important way that the FDIC fulfills its mission “to maintain stability and public 

confidence in the nation’s financial system” is by carrying out all the tasks that are triggered 

by the closure of failed FDIC-insured depository institutions, including the liquidation 

of the assets held by the failed banks.1

 The FDIC learned important lessons from its 

experience during the bank and thrift crisis of the 1980s and early 1990s, which generated 

an enormous volume of failed-bank assets. Many of these assets were retained and managed 

by the FDIC, and this proved to be operationally complex as well as costly. As a result, after 

the first crisis ended, the FDIC adopted a resolution strategy2 that centered on selling assets 

back into the marketplace promptly, either at the time of failure or shortly thereafter. In 

the recent crisis, this strategy had the collateral benefit of conserving cash for the FDIC, a 

benefit that proved to be important as events unfolded (see chapter 5). 

The nature of the 2008–2013 crisis, including both its size and the speed of the upsurge 

in bank failures, made it challenging for the FDIC to sell failed banks and their assets, and 

it required creativity and adaptability to design sales-contract features that would attract 

buyers. Early on, as the crisis intensified and the appetite for purchasing failed institutions 

dwindled in the marketplace, the FDIC responded by including an option to share credit 

losses with acquirers as a feature of its failed-bank offerings.3

 This proved to be quite 

helpful. As market conditions evolved during the crisis, the FDIC responded by modifying 

the contract terms in loss-sharing agreements and adjusting its other asset sales strategies. 

The next section of this chapter provides background information: the definitions of the 

terms “resolutions” and “receiverships” and a summary of the FDIC’s responsibilities for 

resolutions and receiverships; an account of the FDIC’s past strategy with respect to those 

responsibilities; and an overview of the FDIC’s readiness planning in the years preceding 

the outbreak of the recent crisis. The background information is followed by an account 

1 For the FDIC’s mission, vision and values, see https://www.fdic.gov/about/strategic/strategic/mission.html. 

Throughout the chapter, the term “banks” refers to all FDIC-insured depository institutions. 

2 Key terms, such as resolution and receivership, are defined below. 

3 Loss sharing is a sales method where the FDIC sells assets to an acquirer and agrees to pay the acquirer for a 

pre-specified percentage of the future losses on selected failed-bank assets to make the sale more attractive. 

For additional discussion, see the section titled “Loss-Share Purchase and Assumption.” 
176 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

of the dimensions of the crisis the FDIC had to face in 2008. This is followed by two 

sections on the main task of resolutions (the main task is the marketing of failed-bank 

franchises to potential acquirers) and then by two sections on receiverships (whose main 

task is managing and selling the assets that were not acquired at resolution). In each of 

those two subject areas, the first section presents general considerations, preparing the 

way for the second section, which is a narrative and analysis of the decisions the FDIC 

made in fulfilling its resolution and receivership responsibilities during the 2008–2013 

crisis. The chapter ends with a listing and discussion of lessons learned, areas for future 

research and a short conclusion. 

Background: Definitions and Responsibilities, Past Strategy, 

and Readiness Planning 

The background necessary to an understanding of resolution and receivership 

activity during the 2008–2013 crisis covers three areas: basic definitions of terms and 

responsibilities; strategies the FDIC used during and after the previous crisis (1980– 

1994); and the readiness planning that the FDIC engaged in during the period between 

the two crises, when failure activity was minimal. 

Definitions and Summary of FDIC Responsibilities 

When a bank fails, a receivership is established at the moment the bank is closed. Similar 

to bankruptcy proceedings for companies other than banks,4

 a receivership is the legal 

entity where all the affairs of the failed bank are handled. The receivership does not end 

until all the bank’s assets are sold and all the claims against the bank are addressed. The 

term “resolution” is used in multiple ways: often it refers just to the initial phase of the 

receivership, but it is also used for the entire receivership process. In the second sense, 

therefore, a bank is not truly resolved until the receivership itself is terminated. In this 

chapter, however, “resolution” is used in the first sense: the initial phase of the receivership. 

Resolving a failed bank takes place on a date that is established, within statutory 

bounds, through consultation between the bank’s chartering authority and the FDIC.5 

4 For a discussion of the similarities and differences between the receiverships used by the FDIC to resolve 

failed banks and bankruptcy proceedings used for nonbank firms, see Robert R. Bliss and George G. 

Kaufman, “U.S. Corporate and Bank Insolvency Regimes: An Economic Comparison and Evaluation,” 

Federal Reserve Bank of Chicago Working Paper, 2006, https://www.chicagofed.org/publications/workingpapers/2006/wp-01. 

5 Generally, banks must be closed within 90 days after becoming critically undercapitalized. See 12 U.S.C. 

§ 1831(o)(h)(3)(A). If a state chartering authority is unable or unwilling to close a failing bank, then the 

FDIC or, for members of the Federal Reserve System, the Federal Reserve Board can use its authority to 

close the bank and appoint the FDIC as receiver. See 12 U.S.C. §§ 1821(c) (4) and (9). The FDIC used this 

authority to close a state-chartered bank only once during the 2008–2013 crisis, and the Federal Reserve 
CHAPTER 6: Bank Resolutions and Receiverships 177 

On the date the bank fails, these steps are taken in this order: the chartering authority 

revokes the bank’s charter, closes the bank, and appoints the FDIC as receiver;6

 the entire 

failed bank is placed into receivership; and if the FDIC—in preparing for the resolution— 

has succeeded in finding an acquirer for some or all of the failed bank’s assets or liabilities 

or both, those assets and liabilities are removed from the receivership and transferred 

to the acquirer.7

 The date when these events occur is called the resolution date, and it is 

the culmination of a process that has involved much preparation.8

 One major focus of 

the preparation—the FDIC’s attempt to find a buyer for some or all of the failing bank’s 

assets and liabilities—is called franchise marketing.9 

But franchise marketing, important as it is, is just the first step in the receivership 

process that winds up the affairs of failed banks, for after the resolution date, the FDIC’s 

responsibilities as receiver continue.10 The FDIC must service and sell the assets the acquirer 

does not buy; take care of the necessary bookkeeping, accounting, and reporting; identify 

and verify all claims, determine who should get what amount of money, and pay claims as 

funds become available; decide whether to sue anyone for actions that contributed to the 

failure (and follow through if advisable); monitor any ongoing agreements with acquirers 

or the purchasers of assets; and so forth. The receivership is terminated only when all the 

bank’s assets and liabilities have been sold or liquidated or transferred or have otherwise 

passed beyond the FDIC’s responsibility to care for them.11 

The activities of marketing a failed bank’s franchise and managing a receivership 

are distinct from each other but are also closely related. Of the two activities, franchise 

Board also used it only once. 

6 Theoretically, state chartering authorities could appoint an entity other than the FDIC. In practice, this is 

rare and it did not occur during the 2008–2013 crisis. 

7 A lengthy settlement process occurs later to address all the details and matters that are discovered 

subsequently. Note that the FDIC can also separate the last step of this process (the sale to an acquirer) 

from the preceding steps of the resolution process. In that case, the bank fails on that date, but resolution 

occurs later. This option, which does not occur often, is described in the introduction to the section titled 

“Franchise Marketing: The Bidding Process and Resolution Options.” 

8 Not until that date, however, will anything have been set in stone. Sometimes a failing bank manages to 

figure out a way to survive, and its planned closing does not occur. Also, note that in some cases banks must 

be closed with very little preparation, usually because of fraud or liquidity problems (liquidity problems 

occur when the bank lacks the cash needed to pay depositors or other creditors). 

9 Franchise marketing is the process of packaging, marketing, and selling the operating units of an insured 

depository institution. In cases where the operating value of the institution exceeds the liquidation value, 

franchise marketing attempts to retain the incremental value of the operating units of the failing institution 

and allow its viable operations to continue functioning after the failure. 

10 See FDIC, Resolutions Handbook (2014), https://www.fdic.gov/bank/historical/reshandbook/resolutions_ 

handbook.pdf, for a more complete description of the FDIC’s responsibilities and tasks associated with 

resolving failed banks. 

11 To facilitate the conclusion of receiverships, the FDIC, in its corporate capacity, may purchase and assume de 

minimis amounts of receivership assets and liabilities. 
178 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

marketing has a much bigger effect on the FDIC’s cost,12 on the cash requirements of the 

Deposit Insurance Fund (DIF), and on the potential harm that bank failures may do to 

local economies. And franchise marketing shapes many of the receivership management 

activities, from the resolution date through termination of the receivership. For example, 

if the acquirer assumes only the insured deposits, the FDIC must determine the insurance 

status for each depositor and must then pay the uninsured depositors to the extent that 

funds become available. Compared with franchise marketing, however, the receivership 

management process involves a wider range of activities and requires substantially more 

staff and operational resources. 

Although there are unique aspects to each activity, there are also some commonalities. 

Perhaps the strongest commonalities have to do with the sales process in the two activities. 

Franchise marketing involves the selling of part or all of a bank, and receivership sales 

involve the selling of retained assets. Table 6.1 compares these two activities. The FDIC’s 

decisions regarding each of the two key areas reflect both the similar and the dissimilar 

considerations. For both activities, minimizing costs is a major goal, and that goal must 

be considered in light of market realities and the natural trade-off between risk and 

return for assets. 

Table 6.1. Comparison of Franchise Sales and Retained Asset Sales 

Sale Process Characteristic Franchise Sale Retained Asset Sales 

Risk/return trade-offs and other market dynamics The same for both 

Number of possible sale methods Relatively few Many 

Effects on DIF, FDIC cash flow, FDIC operational capacity Very large Present but smaller 

Effects on deposits and depositors Yes No 

Potential effects on local (and sometimes regional or Larger Smaller national) economy 

Number of potential buyers Smallera Larger 

No. Sale must be Flexibility on timing Yes arranged quickly.
 

A mix of general and Only general 
 Statutory constraints specific requirements requirements 

a Theoretically, companies other than banks could purchase assets (but not deposits). There are, however, 

significant challenges to marketing to companies other than banks, especially the short time frame available 

for marketing. The limited marketing time frame is discussed briefly in the section titled “The Bidding 

Process.” To date, only FDIC-insured banks that meet several qualifying criteria, or investors that meet the 

criteria necessary to open a bank and are vetted ahead of time, have been permitted to bid. 

12 Note, however, that the FDIC’s losses are influenced more by the bank’s condition and the quality of its assets 

than by the franchise marketing process or the receivership activities. If there is no acquirer, or if the acquirer 

purchases only a few assets, then the receivership activities have a stronger influence on costs than franchise 

marketing does. 
CHAPTER 6: Bank Resolutions and Receiverships 179 

Past Strategy 

The FDIC’s strategies for handling its resolution and receivership responsibilities in the 

2008–2013 crisis were shaped by its experiences managing the crisis of the 1980s and early 

1990s. During those years, the FDIC managed more than 1,600 bank failures and it also 

initially managed the Resolution Trust Corporation (RTC), which resolved nearly 750 

thrift failures after its creation in 1989.13 In particular, that crisis generated an enormous 

volume of failed-bank assets. The FDIC retained and managed a large share of the assets 

and found the experience to be both costly and operationally complex. As a result, in the 

years after that earlier crisis, the FDIC adopted a resolution strategy that focused on selling 

the assets back into the private sector promptly, either at resolution or shortly thereafter. 

This strategy was chosen because for senior FDIC staff, an important lesson of the 1980– 

1994 crisis was that prompt sales of failed-bank assets were advantageous to the FDIC, for 

four reasons. First, in the early years of the RTC, and to a lesser extent at the FDIC during 

the 1980s, there was an increasingly large inventory of assets—especially troubled assets— 

in receiverships. With such a large build-up of assets that eventually would be sold (also 

known as an “asset overhang”), private investors were concerned that the eventual sale of 

these assets might harm future asset prices; thus they were less willing to purchase the 

assets.14 Senior management believed that, by selling failed banks and failed-bank assets 

through mechanisms like loss-share agreements into the market at whatever terms the 

13 The RTC was a temporary government agency charged with resolving failed thrifts from August 1989 

through year-end 1995. The FDIC’s role in the management of the RTC changed over time. From the 

inception of the RTC through the passage of the RTC Refinancing, Restructuring and Improvement Act 

in December 1991, the FDIC was the exclusive manager. The FDIC had a lesser role in the management 

of the RTC after that, but the FDIC Chairman continued to serve in an oversight role. In addition, the 

RTC Completion Act of 1993, passed in December 1993, required that the FDIC and the RTC create a 

task force to support the transition of the outstanding RTC tasks to the FDIC; it identified and analyzed 

differences in business practices and made recommendations about RTC practices that should be adopted 

by the FDIC. See FDIC, “Final Report on the FDIC/RTC Transition” submitted to the Committee on 

Banking and Financial Services, U.S. House of Representatives and the Committee on Banking, Housing 

and Urban Affairs, U.S. Senate, December 29, 1995. Lastly, the remaining workload and the RTC 

employees were absorbed by the FDIC when the RTC was terminated at the end of 1995. For additional 

discussion on the FDIC authority, see Lee K. Davison, “The Resolution Trust Corporation and Congress, 

1989–1993: Part I,” FDIC Banking Review 18, no. 2 (2006): 38–60, https://www.fdic.gov/bank/analytical/ 

banking/2006sep/article2/article2.pdf, and Lee K. Davison, “The Resolution Trust Corporation and 

Congress, 1989–1993: Part II,” FDIC Banking Review 18, no. 3 (2006): 1–30, https://www.fdic.gov/bank/ 

analytical/banking/2007apr/br18n3full.pdf. For information about the FDIC and RTC resolution and 

receivership activity during this period, see FDIC, Managing the Crisis: The FDIC and RTC Experience 

(1998), https://www.fdic.gov/bank/historical/managing, and RTC, RTC Statistical Abstract (1995). 

14 For additional discussion of asset overhangs, see Jeffrey D. Sachs, “Conditionality, Debt Relief, and the 

Developing Country Debt Crisis,” in Developing Country Debt and Economic Performance, ed. Jeffrey D. 

Sachs, vol. 1, The International Financial System (1989), 255–96; Kent Cherny and O. Emre Ergungor, 

“Effective Practices in Crisis Resolution and the Case of Sweden,” Economic Commentary (February 2009): 

1–4, https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/economiccommentary-archives/2009-economic-commentaries/ec-20090209-effective-practices-in-crisis-resolutionand-the-case-of-sweden.aspx and FDIC, Resolutions Handbook (1998). 
180 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

market would bear, the sales would establish market prices, which in turn would foster 

the recovery of asset markets by providing transparent market prices to other market 

participants. Second, prompt sales helped reduce asset inventories and thus reduced 

receivership expenses. Third, removing the FDIC as the primary custodian of a large 

volume of banking assets is operationally simpler for the Corporation, requiring a smaller 

infrastructure and reducing the potential political pressures that the asset management 

function may elicit.15 Fourth, this strategy conserved the FDIC’s cash (a consideration that 

was important after the 2008–2013 crisis broke, as described in chapter 5). 

A second lesson learned from the crisis of 1980 through 1994 was to avoid hiring 

permanent staff to do temporary work. After that crisis ended, the process of downsizing 

the permanent resolution and receivership staff that had been hired in the 1980s was 

lengthy, disruptive, hard to manage, and harmful to employee morale.16 

Staffing was reduced during the period between 1994 and 2008, when bank failures 

were rare and the need for resolution activities at the FDIC was limited. Seeking to be a 

responsible steward of the DIF, the FDIC controlled its operating expenses to reflect its 

reduced workload. It sought to achieve a balance between maintaining readiness for a 

future economic downturn, on the one hand, and minimizing costs (by maintaining a 

smaller staff and a slimmer infrastructure during a period of few failures), on the other 

hand. By reducing the number of employees, the FDIC recognized the risk that it might be 

initially understaffed if a large number of institutions failed during a short period, but it 

accepted this risk because the probability of such an event seemed remote. 

Readiness Planning 

Nevertheless, the FDIC remained aware that a potential banking crisis always lay on the 

horizon, however distant. Starting in 1999, in response to increasing concentration in the 

banking industry, the FDIC took several actions that focused on readiness for large-bank 

failures. Starting in the early 2000s, in response to its shrinking resolutions workload and 

staff, the FDIC began focusing on resolution readiness planning more generally, taking 

several initiatives to improve its readiness for an increasing volume of failures. 

The actions that focused on readiness for large-bank failures included (a) analyzing 

numerous topics related to large-bank failures in order to become more familiar with the 

problems that could arise; (b) becoming familiar with relevant statutes and regulations to 

identify changes needed to improve the Corporation’s readiness; (c) identifying the likely 

operating challenges and potential responses to them; and (d) conducting simulation 

exercises where staff attempted to respond to scenarios involving hypothetical large-bank 

15 For example, during the 1980–1994 crisis, the FDIC received complaints or requests for more generous 

treatment of borrowers. For additional discussion, see L. William Seidman, Full Faith and Credit: The Great 

S&L Debacle and Other Washington Sagas (1993); and FDIC, Resolutions Handbook (1998). 

16 For additional discussion, see John F. Bovenzi, Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and 

Regulatory Battles (2015). 
CHAPTER 6: Bank Resolutions and Receiverships 181 

failures. To ensure strong communication with other banking regulators and a common 

understanding of the related issues, the FDIC discussed its findings with other regulators, 

and in some cases included other regulators in the simulation exercises. These exercises 

led the FDIC to promulgate several regulations that would improve its readiness for 

large-bank failures: the new regulations clarified the standing of bank creditors in the 

event of failure;17 increased the Corporation’s capacity to provide insured depositors with 

prompt access to their funds after failure;18 and increased the Corporation’s capacity to 

quickly acquire critical information on qualified financial contracts.19 The exercises also 

led to improvements in the Corporation’s processes for management reporting and for 

determining the insurance status of deposit accounts. 

Among the initiatives that focused on readiness for a large volume of failures was 

the Corporate Employee Program (CEP), whose purpose was to train both new and 

experienced FDIC employees in a variety of functions within the organization, with the 

goal of creating a flexible workforce that could be redistributed depending on economic 

conditions and levels of resolution activity. If a significant increase in resolution 

activity occurred, the Division of Resolutions and Receiverships (DRR) would have first 

priority in using employees trained under the CEP.20 A second initiative, taken in 2005, 

was to sign a Memorandum of Understanding with the federal government’s Office 

of Personnel Management that authorized the FDIC, during crisis periods, to waive 

certain restrictions on rehiring retirees. 

The events in the fall of 2008, however, were more severe than the FDIC’s planning efforts 

had envisioned, and—of particular importance—unfolded more quickly than envisioned. 

The Dimensions of the Banking Crisis of 2008–2013 

After more than a decade of modest failure activity and no failures at all from mid-2004 

to February 2007, the banking industry was gripped by crisis from 2008 through 2013. 

During those years, 489 banks were closed and the FDIC, the Treasury, and the Federal 

Reserve used systemic risk exceptions to mitigate the serious adverse effects associated 

17 12 C.F.R. § 360.8. See also 74 Fed. Reg. 5797–5807 (Feb. 2, 2009). Most, but not all, of this rule addressed 

processing complexities associated with sweep accounts. This clarification provided certainty to banks and 

creditors about how these accounts would be treated if a bank failed. 

18 The complexity of the FDIC’s deposit insurance rules can make it hard for the Corporation simultaneously 

to provide quick access to insured funds and deny immediate access to uninsured funds. See 12 C.F.R. § 

360.9. See also 73 Fed. Reg. 41180-41211 (Jul. 17, 2008). 

19 A qualified financial contract is a financial instrument that qualifies for special treatment if a bank fails. 

See 12 C.F.R. § 360.5 for a detailed definition. See 12 C.F.R. pt. 371 for the rule made to improve the FDIC’s 

access to information. See also 73 Fed. Reg. 78162-78173 (Dec. 22, 2008). 

20 For additional discussion, see U.S. Government Accountability Office, “Human Capital and Risk Assessment 

Programs Report,” GAO-07-255, 2007, https://www.gao.gov/assets/260/256532.pdf. 
182 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

with the potential failure of a few large, systemically important banks (see chapter 3).21 The 

489 failed banks held $686 billion in assets and, according to the most recent estimates, 

cost the FDIC $72.5 billion to resolve. Although in the first year of the crisis (2008) only 24 

banks were resolved, one of them was IndyMac, a large California thrift that failed suddenly 

on July 8 and proved to be the most expensive failure in FDIC history (that is, at a cost of 

$12.4 billion, it cost the FDIC the most to resolve); and another of the 2008 failures was 

Washington Mutual, the largest thrift (and the sixth-largest FDIC-insured institution) in 

the country at the time, which failed on September 25 and, with $307 billion in assets, was 

the largest bank failure in the history of the FDIC. In the years following 2008, the dollar 

amount of failed-bank assets declined but the number of resolutions increased, going to 

139 in 2009 and peaking at 159 in 2010. Figure 6.1 provides the number of bank resolutions 

by year, and Figure 6.2 provides failed-bank assets by year of resolution. (Note that, for a 

few banks, the resolution occurred sometime after the bank failed.)22 

Figure 6.1. Number of FDIC Bank Resolutions by Year 

24 

139 

159 

92 

51 

24 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

2008 2009 2010 2011 2012 2013 

21 For details about the origins of the global financial crisis that erupted in 2007, see chapter 1. 

22 In these cases, a bridge bank was formed when the bank failed. (Bridge banks are explained in note 24 and 

in the associated text.) As shown in Table 4.1 (in chapter 4), the number of failures matched the number of 

resolutions from 2011 through 2013. There were 25 failures but 24 resolutions in 2008, 140 failures but 139 

resolutions in 2009, and 157 failures but 159 resolutions in 2010. IndyMac failed in 2008 and was resolved in 

2009. Silverton Bank and Independent Banker’s Bank failed in 2009 and were resolved in 2010. 
CHAPTER 6: Bank Resolutions and Receiverships 183 

Figure 6.2. Total Assets of Failed Banks by Year of Resolution 

Billions of Dollars 

400 

350 $341.2 

300 

250 

$195.7 200 

150 

$96.8 100 

50 $34.9 

$11.6 $6.0 

0 

2008 2009 2010 2011 2012 2013 

Note: Assets are as of the quarter before failure. 

Five of the seven largest banks that failed between 2008 and 2013 had invested heavily 

in riskier forms of single-family mortgages, whereas many of the smaller failed banks 

held significant portfolios of commercial real estate (CRE) loans, especially acquisition, 

development, and construction (ADC) loans.23 The two states with the most failures 

were Georgia (87 bank failures, or 24.6 percent of Georgia banks as of year-end 2007) 

and Florida (70 bank failures, or 21.8 percent). Puerto Rico was also hit hard, for the 

three banks that failed in Puerto Rico, though a small number, constituted 30 percent of 

the banks in that territory. 

Meeting the challenge of resolving 489 banks in six years began with franchise 

marketing. The next section explains franchise marketing: the bidding process and the 

several resolution options available. The subsequent section tells the story of the FDIC’s 

franchise marketing efforts during the six crisis years, highlighting the necessary tradeoffs and constraints. 

23 As of the quarter-end date before failure, single-family loans constituted 74 percent of total loans at the 

seven largest closed banks, but only 22 percent for the remaining 482 banks. For additional information on 

the lending practices that contributed to bank failures, see chapter 4 and U.S. Government Accountability 

Office, “Causes and Consequences of Recent Bank Failures,” GAO-13-71, 2013, https://www.gao.gov/ 

assets/660/651154.pdf. 
184 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Franchise Marketing: The Bidding Process and Resolution Options 

As noted above, when a bank approaches failure, the FDIC prepares to resolve the bank 

by seeking an acquirer so that as many of the bank’s assets and liabilities as possible can 

be sold to the acquirer instead of remaining in the receivership created on the failure 

date. In seeking an acquirer—that is, in marketing and selling a failing-bank franchise— 

the FDIC uses a bidding process that is expected to lead to one of the following 

outcomes, although the expectation is not always fulfilled: a basic purchase of assets 

and an assumption of liabilities (P&A), a whole-bank P&A, a loss-share P&A, or various 

combinations of the P&A options, including a P&A with loan pools. (These options are 

described in the next section.) If there are no bids, or if all the bids are more costly than 

a payout, the FDIC does a payout (also called a liquidation); in a payout, the FDIC pays 

all insured depositors at failure and then receives funds from asset sales gradually over 

time. (For the advantages and disadvantages of using a payout, see the box on page 185.) 

In addition, there are two other alternatives that are permitted by the Federal 

Deposit Insurance Act and were occasionally, though infrequently, used. One is to 

resolve a failed institution by organizing a new insured depository institution called a 

“bridge bank.”24 A bridge bank is typically used when the FDIC does not have enough 

time to effectively market the institution to a third party before failure. The assets and 

liabilities are placed in receivership, a bridge bank is established, and then selected 

assets and liabilities are moved into the bridge bank. The bridge bank is allowed to 

continue normal operations before the final resolution.25 The other infrequently used 

alternative granted to the FDIC by the FDI Act is to organize a Deposit Insurance 

National Bank (DINB). A DINB is a form of payout where the deposit accounts are 

transferred to a newly chartered temporary bank operated by the FDIC. It is similar 

to a bridge bank, but its operations are more limited,26 and its purpose is to ensure 

that depositors have continued access to their insured deposits as they transfer their 

deposit accounts to other financial institutions. 

In seeking potential buyers for failed-bank franchises, the FDIC must take financing 

into consideration. As noted below in the discussion of the bidding process, either the 

FDIC or the acquirer may contribute cash at resolution, depending on whether an 

24 A bridge bank is a temporary national bank operated by the FDIC to facilitate the resolution of an insured 

institution. Certain requirements for private-sector banks are waived for bridge banks (such as capital 

requirements). The life of a bridge bank is normally limited to two years. Although extensions are permitted, 

the FDIC has never pursued one. 

25 The FDIC routinely replaces the failed bank’s senior management and may curtail or shut down any segment 

of the bank’s operations that it chooses (for example, lending operations that contributed to the bank’s 

failure). 

26 For example, loans cannot be originated. Loans are not transferred into the DINB but are retained in 

receivership for disposition. 
CHAPTER 6: Bank Resolutions and Receiverships 185 

acquirer buys more assets than liabilities, more liabilities than assets, or equal amounts 

of both. As a result, resolution choices have a large influence on the FDIC’s cash 

position, which was under pressure during the early stages of the crisis. (See chapter 5 

for additional discussion.) 

Advantages and Disadvantages of Using a Payout 

A payout requires extensive resources for managing and selling all the assets after 

the bank fails. The up-front cash needs for the payout are greater than for any of the 

P&A options and include both capital and working capital. In addition, a payout is 

the resolution method that causes the most disruption to the bank’s customers and 

the local economy: all relationships are lost, and depositors abruptly (but only briefly) 

lose access to their funds.a 

In terms of pricing, the payout has both advantages and disadvantages for the 

FDIC. Advantages include additional time for due diligence (that is, evaluating the 

assets, legal questions, and so forth) and marketing; the ability to publicly announce 

sales initiatives; and a more extensive bidder pool for asset sales that is not limited 

to FDIC-insured institutions. On the other hand, the bank’s franchise value (if any) 

is lost and, in addition, transaction costs are higher, not only because the assets 

and liabilities undergo at least two transfers of ownership (from the failed bank to 

the FDIC, and from the FDIC to the ultimate buyer) but also because receivership 

management costs are greater. 

If the FDIC had used this transaction extensively during the recent crisis, two 

additional problems could have arisen. First, the resulting strains on the FDIC’s 

operating capacity could well have harmed prices because of deteriorating assetservicing quality. Second, the volume of assets held by the FDIC could have been 

large enough to affect market prices. 

From an overall perspective, the payout option is always available but is often the 

more costly approach. 

a Unless a DINB or a paying agent is established, both insured and uninsured depositors lose access 

to funds briefly. The FDIC almost always mails checks to most of the insured depositors by Monday 

or Tuesday (following a Friday failure). Checks that were written by depositors shortly before 

failure, but that had not cleared as of the failure date, are returned. All automated transactions 

scheduled for after the failure date are not executed. 

The Bidding Process 

In the franchise marketing bidding process, the FDIC offers one or more options to 

potential acquirers, and under each option, potential acquirers are invited to take either 

insured deposits only or all deposits. In some cases, the FDIC excludes from its offerings 

some or all of the brokered deposits (that is, deposits provided to the bank by a deposit 
 

186 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

broker). (For a discussion of the role of brokered deposits in resolutions, see the box on 

noncore funding and franchise value in the section below titled “Resolution Options.”) 

In addition, potential acquirers can submit bids that do not conform to the FDIC’s 

offerings. The FDIC considers all bids, even those that do not conform to its offerings. 

The FDIC is required by law to accept the least-cost bid (see box on page 188 for details, 

including conditions under which there may be an exception to the least-cost requirement). 

The FDIC is also required by law to observe certain time periods for appointing a 

receiver for a failing bank, which has implications for the timeline for marketing a failing 

bank. If a bank is failing because it becomes critically undercapitalized, the Prompt 

Corrective Action provision of the Federal Deposit Insurance Corporation Improvement 

Act of 1991 (FDICIA) mandates a hard stop of 90 days before the bank is closed—90 days 

after the bank’s capital breaches the threshold.27 Theoretically the FDIC can prepare for 

a failure before that clock starts running, but in practice it rarely collects the detailed 

data needed for a thorough evaluation of the assets that supports the marketing 

process until after the bank becomes critically undercapitalized. And if the bank fails 

for some other reason, such as fraud or liquidity problems,28 the FDIC has far fewer 

than 90 days to prepare. These timing restrictions may make it difficult for the FDIC to 

collect good-quality information when it sells failed banks and for potential bidders to 

perform comprehensive due diligence. Researchers have found that sellers who provide 

better information about their products receive better prices,29 and therefore the timing 

restrictions may affect the prices that acquirers are willing to pay. In comparison, almost 

no private-sector mergers and acquisitions are performed with that speed. They usually 

take much more time, and in almost all cases the parties have the option of deciding not 

to sell if they do not like the price. 

27 FDIC, Resolutions Handbook (2014), figure 2 (on page 9) provides a typical resolution timeline. The FDIC 

is permitted to extend the time frame by up to 180 days if it determines, in writing, that a brief delay would 

reduce the loss to the DIF. See Section 38 of the FDI Act. This exception has been used occasionally to 

facilitate a private-sector rescue of a bank, but not to facilitate the closing of a bank. 

28 Liquidity problems occur when a bank lacks the cash needed to pay depositors or other creditors. 

29 For examples related to the importance of information in bank resolution, see Larry Benveniste et al, 

“Contract Design for Problem Asset Disposition,” Journal of the American Real Estate and Urban Economics 

Association 22, no. 1 (1994): 149–67; and Stephan Madaus, “Bank Failure and Pre-Emptive Planning: The 

Special Requirements of a Bank Resolution and a ‘Default Resolution Option,’” Working Paper, 2013, https:// 

papers.ssrn.com/sol3/papers.cfm?abstract_id=2277452. For examples that relate the value of information to 

asset sale prices, see Sudhir Nanda, James E. Owens, and Ronald C. Rogers, “An Analysis of Resolution Trust 

Corporation Transactions: Auction Market Process and Pricing,” Real Estate Economics 25, no. 2 (1997): 

271–94; Joao Granja, “The Relation between Bank Resolution and Information Environment: Evidence from 

the Auctions for Failed Banks,” Journal of Accounting Research 51, no. 5 (December 2013): 1031–70; and 

James A. Berkovec, John J. Mingo, and Xeuchun Zhang, “Premiums in Private versus Public Bank Branch 

Sales,” Federal Reserve Board’s Finance and Economic Discussion Series Working Paper, 1997, https://www. 

federalreserve.gov/pubs/feds/1997/199733/199733pap.pdf. 
CHAPTER 6: Bank Resolutions and Receiverships 187 

As for the bidding process itself, the details have changed over time but the basic idea 

is always that an acquirer tells the FDIC what assets and liabilities from the failed bank 

it is willing to take,30 as well as what (if any) money will change hands. Each acquirer 

essentially asks for the amount of additional cash that it wants. If, for example, the value 

of the assets bought by an acquirer exactly offsets the liabilities assumed, the bidder may 

not ask for any FDIC payment. But if the value of the liabilities exceeds the value of the 

assets (if, in other words, there is a capital shortfall), the acquirer will usually want cash. 

Sometimes the acquirer is willing to take less cash—perhaps because it believes it will 

be able to manage the bank in a way that gives it a high return at that price, or because 

the failed bank fits its business strategy well and the acquirer is afraid someone else will 

offer a lower bid. At other times, an offeror may demand more cash—perhaps because it 

wants a higher profit margin. And if the value of the assets purchased exceeds the value 

of the liabilities assumed, the acquirer will generally pay the FDIC.31 (See box on page 

194 for a discussion of financing for the aquirer.) 

Once the FDIC receives all the bids, it performs the least-cost test analysis and 

determines which acquirer—and which transaction—is the winner, and that is the 

transaction that the FDIC executes. As noted above, if there are no bids that cost less 

than a liquidation, the FDIC chooses the liquidation. Bids usually do not come in until 

about a week before the resolution date, and it is only after the FDIC receives the bids 

and estimates the related costs that the Corporation knows which is the winning bid or 

discovers that it will be liquidating the bank. 

As a result of the marketing process, the FDIC knows who is likely to bid, but 

sometimes a bidder that showed strong interest may back out at the end, or a bidder who 

showed only lukewarm interest may end up submitting the winning bid. Furthermore, 

there is a vetting process, so the winning bidder is always on a pre-approved list of 

banks that are permitted to bid.32 

30 This is usually accomplished by bidding on an FDIC offering that stipulates the liabilities to be assumed and 

the assets to be purchased. As mentioned above, however, the bidder can submit bids that do not conform to 

the FDIC’s offerings. 

31 For example, this might occur if the acquirer takes all the bank’s assets but does not take the brokered 

deposits. In this case, the FDIC will pay the brokered deposits directly. Note that the FDIC’s funding 

requirements for a failed bank are not necessarily the same as the amount of funds provided to the acquirer 

at resolution (there are often funding requirements related to those assets and liabilities that remain in the 

receivership). 

32 As discussed below (in the section titled “Private Equity Acquirers”), some firms were allowed to create a 

new bank charter to acquire a failed bank. These firms also underwent a vetting process. 
188 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The Least-Cost Test 

The least-cost requirement is a statutory standard applied to the resolution of failing 

banks under the FDI Act, as amended in 1991 by FDICIA.a As a general rule, it requires 

that the FDIC determine, after any bids for a failing bank are received, whether any 

of those bids would impose a lesser cost on the DIF than a payout of insured deposits 

and associated liquidation of the failed bank's assets. If more than one bid qualifies, 

then the bid presenting the least cost to the DIF is accepted. The least-cost test is 

applied separately to every bank failure.b

 In addition, the FDIC is legally permitted to 

liquidate a bank even if liquidation is not the least-cost alternative. 

The FDIC uses its experience to determine what the market will bear and its 

knowledge of the bank to design offerings for the failed-bank auction. Qualified 

acquirers can submit bids that do not conform to the FDIC’s offerings. All bids 

must be analyzed for the least-cost test, including those that do not conform 

to the FDIC’s offerings. A bid can be rejected if the cost of the bid cannot be 

estimated. Furthermore, a bid can be rejected even if it meets the least-cost test if 

(a) the transaction is impossible to execute, or (b) the bid failed to meet various 

regulatory requirements, or (c) the FDIC believes the resulting institution would 

be unsafe and unsound. 

a See https://www.fdic.gov/regulations/laws/rules/1000-1500.html for details. An exception is permitted 

for systemic risk. For the banks discussed in this chapter, however, the systemic risk exception was 

not used. (On use of the systemic risk exception during the crisis of 2008 to 2013, see chapters 2 

and 3.) 

b The FDIC faces additional statutory constraints related to its funding options and receivership 

operations. For a complete list of these constraints, see https://www.fdic.gov/regulations/laws/rules/. 

Resolution Options 

As noted above, the franchise marketing process is expected to lead to some form or 

variant of a purchase and assumption (P&A) transaction, although in fact there may be 

no bidder, or no viable bid, and in either of those cases, the FDIC will liquidate the bank, 

as explained above. The four forms of a P&A transaction are the basic P&A, the wholebank P&A, the loss-share P&A, and the P&A with loan pools. Table 6.2 defines each of 

these options, which are discussed in more detail below. 
CHAPTER 6: Bank Resolutions and Receiverships 189 

Table 6.2. Common P&A Transactions 

Basic P&A The acquiring institution assumes deposits and generally purchases only the failed 

institution’s cash, cash equivalents, and marketable securities. 

Whole-Bank 

P&A 

The acquiring institution assumes deposits and purchases all—or almost all—of the 

assets of the failed institution on an “as is” discounted basis (with no guarantees). 

Loss-Share P&A The acquiring institution assumes deposits and purchases assets of the failed institution 

beyond those acquired in a basic P&A, and the FDIC as receiver agrees to share losses 

on certain types of assets (up to an established limit) with the acquiring institution. In 

most cases, this agreement is very similar to the whole-bank P&A except for the losssharing provision on some of the assets purchased. 

P&A with Loan 

Pools (and Other 

Combinations) 

For loan pools, the acquiring institution assumes deposits and purchases the failed 

institution’s cash, cash equivalents, marketable securities, and pools (groups) of loans 

or other assets. Bids are submitted and evaluated separately for each loan pool. 

Alternatively, the FDIC may effectively combine these options. For example, the FDIC 

may offer deposits, cash, securities, and single-family mortgages, plus a separate loan 

pool for all other consumer loans (thus, ORE [other real estate]a

 and commercial loans 

are excluded). Two other examples of frequently used combinations are (1) a wholebank offering, except with pools for ORE and ADC loans; and (2) a mix of options 

across multiple banks that are all scheduled to fail on the same date. 

a ORE is real estate that is not used by the bank for its normal operations, and comprises primarily real
 

estate that the bank owns because of a foreclosure on loan collateral.
 

Basic Purchase and Assumption. In a basic P&A, the deposits,33 cash, and low-risk 

securities of the failed bank are passed to an acquirer, and the remaining assets are 

retained in the receivership. The FDIC provides cash in accordance with the winning 

bid; the amount of the cash roughly equals the difference between the deposits and the 

market value of the assets of the failed bank that were purchased by the acquirer. This 

resolution method offers two benefits compared with a liquidation. First, it allows at least 

some of the bank’s deposit franchise value to be retained (on franchise value, see box on 

page 190). Second, there is less disruption because depositors receive continuous deposit 

processing services. During the crisis, many potential acquirers were not interested in a 

basic P&A because consumer demand for insured deposits was high (thus they could 

readily find deposits by other means) and they saw few opportunities to invest the cash 

promptly and meet their required return. 

33 This can be either all deposits or only insured deposits. Some or all brokered deposits may be excluded as 

well. 
190 

c 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Noncore Funding and Franchise Value 

Many banks that failed funded their operations by using brokered deposits, Internet 

deposits, repurchase agreements, and Federal Home Loan Bank (FHLB) advances— 

collectively, noncore funding— but these funds rarely contributed to franchise value. 

In all, the banks that failed between 2008 and 2013 held higher levels of brokered 

deposits and FHLB advances than healthier banks. In terms of dollars, failed banks 

held $44.6 billion in brokered deposits (9.8% of all failed-bank deposits) and $14.5 

billion in Internet deposits (3.2%) at failure. In terms of number of banks, 386 failed 

banks (79%) held brokered deposits, 279 (57%) held Internet deposits, and 248 (51%) 

held both brokered and Internet deposits. Acquiring banks usually had no interest in 

these deposits: whereas 97% of nonbrokered deposits were assumed by other banks 

at failure, only 20% of brokered deposits were assumed.a 

As of the quarter before failure, 337 failed banks (69%) held FHLB advances. 

Excluding Washington Mutual, FHLB advances constituted 13.3% of failed-bank 

liabilities.b

 FHLB advances sometimes reduced the value of the failed banks even more 

than brokered deposits did because of prepayment fees, high overcollateralization 

rates,c

 and concerns that the FHLB advances did not fit into the acquirers’ asset 

liability management plans. 

a Starting in April 2009, the FDIC generally did not include in its resolution offerings the brokered 

deposits that were processed by the Depository Trust and Clearing Corporation (a clearing and 

settlement company). The FDIC usually did include other types of brokered deposits. 

b Including Washington Mutual, the percentage increases to 16.5%. 

Overcollateralization occurs when the assets that are pledged to secure the debt exceed the amount 

of debt issued. FHLBs sometimes increase the required levels of overcollateralization as bank health 

declines, and in some cases, FHLBs required a “blanket” lien that encompassed all the bank’s assets. 

Whole-Bank Purchase and Assumption. The whole-bank P&A is what its name implies: 

essentially all the bank’s assets and all its liabilities are bought by the acquirer. This 

transaction minimizes market disruption and requires fewer staff to execute than 

transactions where the FDIC retains more assets. It also conserves cash for the FDIC, 

because although the FDIC provides cash up front to address the capital shortfall, the 

assets and deposits are sold together and therefore there are minimal ongoing working 

capital needs. Because of uncertainty about the value of the failed-bank assets, the wholebank option was rarely cost-effective at the height of the crisis: the risk premiums 

demanded by potential acquirers were simply too great. As the crisis abated and asset risk 

premiums fell, the whole-bank option became more attractive. Even during good times, 

however, one implication of this option is that the pool of bidders is limited to healthy 

FDIC-insured institutions (deposits can be sold only to FDIC-insured banks). Nonbank 

bidders are unable to bid on the assets even if they want to purchase them (the restricted 
CHAPTER 6: Bank Resolutions and Receiverships 191 

competition could reduce prices) and even though nonbank bidders frequently offer the 

highest bids for retained asset sales. In addition, bidders are expected to take almost all the 

assets even if they would prefer to take only a subset.34 Some studies have argued that the 

whole-bank option may not be cost-effective because the best acquirer for the troubled 

assets may not be the same party as the best acquirer for the performing assets.35 In 

addition, the lack of adequate time to perform due diligence (because of the brevity of the 

marketing period) may increase an acquirer’s perception of asset risk and thus reduce the 

price that the acquirer is willing to pay. 

Loss-Share Purchase and Assumption. A loss-share P&A is very similar to the wholebank P&A except that the FDIC, as receiver, agrees to share losses on certain types of assets 

(up to an established limit).36 See the box on page 192 for an example. Like the wholebank transaction, the loss-share P&A minimizes disruptions to the bank’s customers and 

the local community, and conserves cash for the FDIC. In terms of staffing, the loss-share 

option requires more resources than the whole-bank option (in order to monitor the lossshare agreements after the bank fails) but substantially fewer resources than a basic P&A 

(or, for that matter, than a payout). Depending on circumstances, the effects of loss share 

on the pricing of the failed-bank franchise may vary. During periods of distress when asset 

values become highly uncertain, loss share offers clear advantages: the FDIC retains much 

of the risk exposure and therefore loss share may improve franchise sale prices; it allows 

the FDIC to tap the government’s comparative advantage in absorbing large risks;37 and it 

enables the FDIC to participate in asset price improvements after banks fail (by reducing 

loss share payments).38 However, loss share is like whole-bank P&A in two respects: it 

34 In this situation, the bids may incorporate low estimates of asset value for the unwanted assets. 

35 Roger Kormendi et al., Crisis Resolution in the Thrift Industry (1989), and FDIC, “FDIC Policies for the 

Resolution Trust Corporation,” Draft White Paper, S&L Study Group, 1989, recommend that good assets 

and troubled assets be sold separately. 

36 The FDIC in its corporate capacity acts as a backstop as well. 

37 This comparative advantage has been explored in insurance markets. Insurance companies in the private 

sector must hold capital (which is costly) to protect themselves from bankruptcy if large adverse events (such 

as major hurricanes) occur. To protect themselves from bankruptcy, the companies sometimes purchase 

re-insurance or catastrophe insurance. The price for insuring against large but unlikely risks is substantially 

higher than expected losses. As the size of the loss exposure increases and the likelihood of occurrence 

decreases, the ratio of insurance cost (for re-insurance or catastrophe insurance) to expected losses tends 

to increase exponentially. On the other hand, the federal government is a much larger entity and can more 

easily go into debt or increase taxes to cover large unexpected risks. For additional discussion, see Kenneth 

A. Froot, “The Market for Catastrophe Risk: A Clinical Examination,” Journal of Financial Economics 60 

(2001): 529–71, and Morton Lane and Olivier Mahul, “Catastrophe Risk Pricing,” World Bank Policy 

Research Working Paper 4765, 2008, https://openknowledge.worldbank.org/bitstream/handle/10986/6900/ 

WPS4765.pdf?sequence=1&isAllowed=y. 

38 In addition, it could increase “true-up” payments, which are described later in the section titled “Evolution 

of FDIC Franchise Sale Offerings.” 
192 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

limits the pool of potential bidders to healthy banks, with the result that the restricted 

competition could reduce prices, and it asks bidders to purchase almost all the assets and 

deposits, even if their preference is to purchase only a subset of the failed bank’s assets. 

Some researchers have recommended loss share because the government is better 

positioned to absorb large risks than the private sector and because it helps address the 

lack of comprehensive information at resolution (on the part of both the FDIC and the 

acquirer) caused by the short duration of the marketing period.39 In addition, the FDIC’s 

experience with loss share in the early 1990s was positive.40 

Example of Loss-Share Purchase and Assumption 

Assume a failing bank that holds $100 in assets and $100 in liabilities. All liabilities 

are insured deposits. The FDIC offers a whole-bank resolution with 80 percent 

loss-share coverage on the loan portfolio, which makes up 70 percent of the assets. 

The loss-share coverage is based on the book value of the loans ($70), and it covers 

some—but not all—of the expenses associated with managing the loans. 

The acquirer submits a $7 discount bid. The FDIC pays the acquirer $7 at resolution. 

The acquirer collects $50 on the loans (net of expenses covered under the agreement) 

over time, so that $20 in asset losses ($70 book value minus $50 net asset recovery) are 

incurred and covered by the agreement. The FDIC pays the acquirer $16 (80 percent 

of $20) to cover its share of the loss. The acquirer pays the other $4 (20 percent of $20), 

plus any other costs that are not covered by the loss-share agreement. 

Note that, in the bidding process, the acquirer with the smallest discount bid 

wins (assuming that all other aspects of the bid are the same). The discount does 

not influence the calculation of the loss-share payments.a 

a This is a simplified example. See https://www.fdic.gov/bank/individual/failed/lossshare/ for 

additional discussion and https://www.fdic.gov/bank/individual/failed/bankofmiami-p-and-a.pdf 

for an example of an agreement that includes details about the loss-share coverage. 

39 See the section below titled “The Bidding Process” for additional discussion of the marketing period. 

Larry Benveniste et al., “Contract Design for Problem Asset Disposition,” Journal of the American Real 

Estate and Urban Economics Association 22, no. 1(1994): 149–67, suggested—as support for the use of 

risk-sharing choices for failed-bank resolutions—that governments were better placed to absorb large 

risks than the private sector. Mark Speigel, “The Disposition of Failed Japanese Bank Assets: Lessons from 

the U.S. Savings and Loan Crisis,” FRBSF Economic Review (2002): 1–15, https://www.frbsf.org/economicresearch/files/article1-2.pdf, suggests loss share as a way to overcome information shortages at resolution. 

FDIC, “Study of Purchase and Assumption Transactions,” Unpublished Manuscript, Office of Corporate 

Planning, 1977, recommends risk-sharing as a response to inadequate information at resolution. FDIC, 

“FDIC Policies for the Resolution Trust Corporation,” Draft White Paper, S&L Study Group, 1989, suggests 

gain-sharing for both reasons. 

40 FDIC, Managing the Crisis: The FDIC and RTC Experience (1998), 193–205, https://www.fdic.gov/bank/ 

historical/managing. 
CHAPTER 6: Bank Resolutions and Receiverships 193 

Loan Pools and Other Combinations of the Basic Options. The FDIC can also offer 

numerous combinations of the basic options. One commonly used option, called “loan 

pools,” is to group the assets of the failed bank into homogeneous pools at resolution, 

ask bidders to submit separate bids for each pool (and for deposits), and allow bidders 

to “link” bids, that is, allow them to set requirements for the minimum combination 

of assets and deposits that they will accept. Another combination is to simply exclude 

certain assets or liabilities from the initial franchise offering and sell them later. For 

example, distressed assets could be retained in the receivership so that they could be 

offered later to both bank and nonbank bidders. 

A key benefit of these options is that they more easily attract bidders that are interested 

in some—but not all—of the assets. In addition, bidders that are willing to bid for the 

whole bank but that place very little value on certain types of assets held by the failed 

bank might offer better prices. However, compared with whole-bank offerings (with and 

without loss share), these options are harder to execute, especially if the FDIC’s operational 

capacity is poorly positioned to manage the tasks needed to execute the transaction. In 

addition, these options often require more cash and may be more disruptive to bank 

customers and the local economy than the whole-bank options.41 

Theoretically, these options could be extended to allow asset workout companies (that 

is, companies that specialize in managing and selling delinquent loans and/or troubled 

real estate) or other nonbank firms to bid on the assets—but not the deposits—of 

the failed bank at resolution. Although this approach offers significant advantages by 

enlarging the pool of potential bidders for failed-bank assets, it also entails substantial 

operational challenges because of the very brief marketing period for failed banks and 

concerns about confidentiality. 

Yet another variation is to market assets and deposits from multiple banks at the 

same time. Some analysts have recommended this approach as a way to improve bidder 

interest and, potentially, prices.42 Both theory and the FDIC’s experience indicate that 

the use of linked bids across multiple failed banks is effective and should be considered 

when circumstances allow. 

In summary, the various options for combining types of resolution offer the potential 

for lower costs because the number of potential bidders is greater and bidders can more 

easily limit their purchases to the types of assets they most desire. However, these options 

generally require more FDIC resources (both staff and time) and are harder to execute 

41 FDIC, “FDIC Policies for the RTC,” recommended holding back troubled assets from the initial resolution 

offering to improve prices. Offering troubled assets as a separate loan pool accomplishes the same objective. 

Roger Kormendi et al., Crisis Resolution, also suggested that troubled loans be sold separately. The principles 

espoused in Edward J. Kane, “Principal-Agent Problems in S&L Salvage,” Journal of Finance 45, no. 3 (1990): 

57–61, also support this approach (although Kane does not specifically recommend it). 

42 FDIC, “FDIC Policies for the RTC,” recommends linked bids. Donald R. Fraser and Hag Zhang, “Package 

Bidding in Thrift Resolutions,” Journal of Financial Services Research 11, no. 3 (1997): 283–94, and Office of 

Management and Budget, “Resolving the Thrift Crisis,” 1993, xiv, suggest combining thrifts for sale. 
194 

c 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

than the whole-bank options. In addition, the extent of working capital requirements is 

less predictable, as are the need for staff and the possibility of market disruption. 

Financing for the Acquirer (Seller Financing) 

In some cases, acquirers owed the FDIC money at resolution. This situation arose 

whenever the acquirer purchased assets from the failed bank that were worth more 

than the liabilities that they assumed from the failed bank.a

 In this case, it might be 

beneficial for the FDIC to offer to finance some or all of the acquirer’s contribution, 

potentially improving the bid price, the availability of bidders, or both. 

The FDIC provided seller financing to failed-bank acquirers several times in the 

1970s as a way to improve demand and expand the bidder pool for failed banks.b 

The FDIC also used seller financing for three resolutions during the recent crisis: 

the Puerto Rico banks that failed in April 2010. Only a few potential acquirers 

had expressed an interest in acquiring the Puerto Rico banks, and the FDIC was 

concerned that some of the acquirers lacked the liquidity necessary for a successful 

acquisition. In all three cases, the acquirers purchased substantially more assets 

than the deposits they assumed.c

 Without seller financing, the acquirers would 

have needed to bring substantial amounts of cash to close the deals. 

a This usually occurred when the acquirer purchased most or all of the assets but did not assume all 

the deposits—frequently in cases where a substantial amount of brokered deposits were retained 

in the receivership, or where the acquirer purchased only asset pools. For example, if the acquirer 

purchased $100 in assets and assumed $60 in liabilities, it would owe the FDIC $40 at resolution. 

Note that asset values incorporate the bid price demanded by the acquirer. 

b FDIC, “Study of Purchase and Assumption Transactions,” Unpublished Manuscript, Office of 

Corporate Planning, 1977. 

All three failed banks had large amounts of brokered deposits that were, for the most part, not 

assumed by the acquirers. For example, Banco Popular purchased $9.2 billion in assets from 

Westernbank but assumed only $2.4 billion in liabilities, so assets exceeded liabilities by $6.7 

billion. The FDIC provided $5.8 billion in seller financing to close the transaction. 

Franchise Marketing during the Crisis 

From 2008 through 2013, the franchise marketing process evolved as conditions 

changed. Resolution staff were operating under constant pressure amid great 

uncertainty, and they had to consider multiple trade-offs in the light of competing 

goals and objectives. Discussed in this section are the options they chose and the 

changes they made over time; the role played by bridge banks; the role played by 

the opportunity to involve private equity acquirers; and the aggregate results for 

resolutions during the crisis. At the end of the process, the winning bids affected the 
CHAPTER 6: Bank Resolutions and Receiverships 195 

FDIC’s overall financial position, risk exposure, and staffing requirements, and may 

also have influenced the local economies where bank failures were concentrated. 

Evolution of FDIC Franchise Sale Offerings 

At the outset of the financial crisis, the primary resolution tools in use at the FDIC were 

whole-bank P&A and P&A with optional loan pools. The use of these two options was 

in keeping with the objective of moving failed-bank assets back into the marketplace 

promptly and minimizing costs. Early in the crisis, however, investors’ appetite for risk 

plummeted, so that the FDIC faced not only a lack of buyers for loan pools but also little 

interest in standard whole-bank purchases; moreover, buyers also showed little interest in 

buying the assets that were retained in receivership. In response to the evolving crisis, the 

FDIC sought to adapt its offerings to include sales-contract features that would attract 

buyers. This situation led the Corporation to rely increasingly on loss sharing as a feature 

of its failed-bank offerings in order to resolve the growing number of bank failures.43 

Many acquirers preferred the loss-share option, and by the middle of 2009, whole bank 

with loss share became the dominant FDIC franchise marketing option, and often the 

only one offered to potential acquirers. As the crisis continued and conditions in the 

marketplace changed, the FDIC modified the contract terms in loss-sharing agreements. 

The starting point, though, was the experience the FDIC had had with its loss-share 

program in the early 1990s. 

The original (2008) agreements offered 80 percent loss-share coverage for capital 

losses and selected expenses. For single-family assets, coverage was provided for ten 

years. For other assets, coverage was provided for five years, and in addition the acquirer 

was required to share recoveries with the FDIC for another three years. If losses exceeded 

a pre-specified level, loss-share coverage increased to 95 percent. 

In October 2009, the FDIC added a “true-up” feature that was designed to claw back 

some of the extra profits from acquiring banks in cases where the asset losses were lower 

than anticipated at the time of failure. There were true-up provisions for 215 transactions, 

or 71 percent of the loss-share transactions. 

In April 2010, in response to improving markets, the FDIC stopped offering the 

increase to 95 percent coverage. In June 2010, the FDIC dropped loss-share coverage 

for consumer loans44 and began soliciting bids for the loss coverage rate of up to 80 

percent for all other types of loans and for other real eastate (ORE). In September 2010, 

the FDIC introduced a tiered loss-sharing structure that was designed to improve the 

43 For additional discussion, see the section above titled “Loss-Share Purchase and Assumption” and https:// 

www.fdic.gov/bank/individual/failed/lossshare/. 

44 Consumer loans are smaller than other types of loans and therefore administrative costs are relatively high, 

but for most banks during the crisis, anticipated losses on consumer loans were modest. Thus it seemed less 

likely that loss share yielded a net benefit for these loans. 
196 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

acquirer’s incentives to minimize asset losses.45 But because of the complexity of that 

structure, it was used only 27 times. In all, the FDIC provided 95 percent coverage for 97 

transactions, or 32 percent of the loss-share transactions. 

In early 2011 the FDIC began to expand its regular offerings, typically offering three 

versions of a whole-bank resolution: no loss-share coverage; loss share for commercial 

assets only; or loss-share coverage for single-family and commercial assets. In April 

2012 the FDIC began to limit its offerings of loss-share coverage for single-family assets 

to those failed banks that had extensive amounts of troubled single-family loans. As 

conditions continued to improve, loss sharing was gradually phased out. In the fourth 

quarter of 2013, the FDIC dropped loss share altogether from its regular offerings and 

started offering loan pools (in addition to whole-bank transactions) whenever the loans 

could be pooled logically and potential bidders expressed an interest in them. 

Throughout the crisis, in considering how to structure its resolution offerings, the 

FDIC regularly reached out to potential acquirers, listened to them, and, if appropriate, 

adjusted its offerings accordingly. When potential acquirers showed little interest in the 

FDIC’s whole-bank offerings for a particular failing bank, the FDIC considered ways to 

address the potential acquirers’ concerns, usually by expanding its offerings. The most 

typical additions were “modified” whole bank (where certain troubled assets, such as 

ORE, delinquent loans, or ADC loans, would be retained in receivership but all other 

assets were included in the offering) or loan pools. In some cases, the FDIC would 

develop unique proposals to address unique situations. 

In cases where the FDIC lacked enough time to market banks effectively before they 

failed, the FDIC used bridge banks. (See note 24 and the associated text.) 

Bridge Banks 

Following the 1980–1994 crisis, senior FDIC staff anticipated that bridge banks would be 

an important option for resolving the failures of large insured depository institutions.46 

During the 2008–2013 crisis, however, the FDIC used bridge banks for bank failures only 

three times. 

45 The agreement provided relatively high FDIC coverage for losses that fell below a pre-set threshold (where 

it was likely that losses would be incurred, regardless of asset servicing quality) and above a higher pre-set 

threshold (where losses were unlikely to occur unless servicing quality was poor or markets deteriorated). In 

the middle tier, the FDIC’s coverage rate was low. For an example of this kind of agreement, see https://www. 

fdic.gov/bank/individual/failed/horizonfl-p-and-a.pdf. 

46 For example, see Arthur J. Murton, “Resolving a Large Bank: The FDIC’s Perspective,” speech given at 

the Seventh Annual Banking Conference at the Federal Reserve Bank of Chicago, October 1, 2004; and 

James A. Marino and Lynn Shibut, “Resolution Strategies for Large U.S. Commercial Banks,” Unpublished 

Manuscript, 2006. 
CHAPTER 6: Bank Resolutions and Receiverships 197 

The first time was when IndyMac, a $30 billion thrift, failed suddenly in July 2008.47 

IndyMac’s size alone would have made its resolution difficult; however, its size was only 

one of several complicating factors. After the long period of almost no bank failures, the 

level of media interest in IndyMac’s failure was unusually high; and a large number of 

depositors—roughly 30,000—held potentially uninsured deposits and therefore did not 

immediately gain access to all the deposits held in their accounts.48 During the first two 

weeks after IndyMac’s failure, a run on deposits led to the withdrawal of almost $3 billion 

from the newly chartered bridge institution, IndyMac Federal.49 The unprecedented 

deposit withdrawals likely reduced IndyMac Federal’s franchise value and clearly signaled 

to the FDIC that a much deeper issue was lack of trust in the financial system. The FDIC 

quickly took action and began a campaign to educate the public on deposit insurance 

and the FDIC. After a few weeks, the withdrawal rate at IndyMac Federal slowed and the 

deposit base stabilized, but the IndyMac experience highlighted the risks and challenges 

of deploying the bridge bank structure. 

In 2009, the FDIC used bridge banks to resolve two bankers’ banks.50 Bankers’ banks 

provide a variety of banking services to other depository institutions. They are harder to 

resolve than traditional depository institutions for two main reasons. First, only depository 

institutions are permitted to be shareholders of bankers’ banks, and very few banks are 

interested in entering this specialized business area. Second, they present resolution 

difficulties because of their interconnectedness with other depository institutions. One of 

the banks was sold to another bankers’ bank shortly after the failure; the other one was paid 

out after the customers were given time to move their deposits to other banks. 

Private Equity Acquirers 

Another consideration for the FDIC in marketing failed banks was the possibility of 

expanding the number of acquirers by working with private equity investors. Private 

equity investors are wealthy individuals (or groups of individuals) who are seeking highyield investments, and as the crisis unfolded, several private equity investors expressed 

an interest in purchasing failed banks. The FDIC wanted to ensure that any purchase of 

failed banks by private equity investors was consistent with, and in the best long-term 

47 Because IndyMac was a thrift institution, the bridge bank was technically a conservatorship due to a gap in 

the law that was since addressed. 

48 Many of these depositors were later found to be fully insured, but over the closing weekend the FDIC lacked 

full information, so funds were held back until the insurance status of these deposits could be determined. 

What made the deposit insurance determinations at IndyMac so challenging was the volume of deposit 

accounts, including brokered deposits and a large number of trust accounts (the latter are governed by 

complex deposit insurance provisions). 

49 John F. Bovenzi, Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles (2015), 16. 

50 Silverton National Bank failed on May 1, 2009, and Independent Banker’s Bank failed on December 18, 2009. 
198 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

interests of, the banking industry. The FDIC also sought open discussion and transparency 

surrounding the participation of private equity firms in the banking industry. 

The FDIC was well aware of the associated risks, but it was also cognizant of the 

potential benefits. The risks derive from the nature of banking, which is a unique business 

that requires specialized management skills—skills that many private equity investors may 

not fully appreciate. Newly chartered banks have historically failed at much higher rates 

than well-established banks,51 and the takeover of a failed bank and its troubled assets 

introduces additional complications that most de novo banks do not have to face. In 

addition, private equity investors generally prefer short-term investments (often seeking to 

cash out in three to five years), a preference that could prove problematic in running and 

managing a bank. At the same time, however, new investors might increase the number of 

bidders for failed banks and infuse capital into the industry, thus potentially increasing the 

availability of credit to businesses, consumers, and the overall economy. 

On November 21, 2008, the Office of Comptroller of the Currency (OCC) announced 

the availability of a “shelf ” charter that would facilitate the purchase of failed banks 

by private equity investors.52 A shelf charter allows investors to seek conditional and 

preliminary approval of a bank charter that will become active only if the investor 

purchases a failed bank. On July 9, 2009, to address the risks posed by private equity 

investment, the FDIC published a proposed Statement of Policy on qualifications for 

failed-bank acquisitions,53 and on September 2, 2009, the Corporation released a final 

Statement of Policy.54 The Statement of Policy addressed requirements related to capital, 

source of strength,55 time restrictions on selling the depository institution, ownership 

51 Robert DeYoung, “De Novo Bank Exit,” Journal of Money, Banking and Credit 35, no. 5 (2003): 711–28, found 

that de novo banks that were established between 1980 and 1985 failed at much higher rates than other banks 

during the period after they consumed their start-up capital but before they became mature. In addition, he 

found that de novo banks that were established during a period of stress were more likely to fail than other 

de novo banks. Yan Lee and Chiwon Yom, “The Entry, Performance, and Risk Profile of De Novo Banks,” 

FDIC Center for Financial Research Working Paper 2016-03, 2016, https://www.fdic.gov/bank/analytical/ 

cfr/2016/wp2016/2016-03.pdf, found similar results for de novo banks chartered between 2000 and 2008. 

52 See Office of the Comptroller of the Currency, “OCC Conditionally Approves First National Bank Shelf 

Charter to Expand Pool of Qualified Bidders for Troubled Institutions,” NR 2008-137, November 21, 2008, 

https://www.occ.gov/news-issuances/news-releases/2008/nr-occ-2008-137.html. The Office of Thrift 

Supervision (supervisor of thrifts until 2010, when it was abolished by Dodd-Frank) later announced a 

program as well. 

53 FDIC, “Proposed Statement of Policy on Qualifications of Failed Bank Acquisitions,” 74 Fed. Reg. 32931– 

32934 (Jul. 9, 2009), https://www.fdic.gov/regulations/laws/federal/2009/09policyJuly9.pdf. 

54 FDIC, “Final Statement of Policy on Qualifications of Failed Bank Acquisitions,” 74 Fed. Reg. 45440-45449 

(Sept. 2, 2009), https://www.fdic.gov/regulations/laws/federal/2009/09FinalSOP92.pdf. For additional 

discussion, see also Frank Righeimer Martin, “Private Equity Investments in Failed Banks: Appropriate 

Investors Welcome,” North Carolina Banking Institute 14, no. 1 (2010), http://scholarship.law.unc.edu/ncbi/ 

vol14/iss1/17. 

55 Under a source-of-strength requirement, the owner is required to provide additional capital to the depository 

institution if its capital falls below specified thresholds. 
CHAPTER 6: Bank Resolutions and Receiverships 199 

structure, and disclosure. On November 26, 2008, the FDIC announced that it had 

established a modified bidder qualification process that allowed interested parties that 

did not have a bank charter, such as private equity investors, to bid for failed banks.56 

From 2008 to 2013, 18 private equity investor groups purchased 60 failed banks (or 

12 percent of the banks that failed in those years). These failed banks held $84 billion 

in assets (12 percent of all failed-bank assets over the same period), and the investors 

purchased $75 billion in assets held by these banks. (Excluding Washington Mutual, 

the private equity investor groups purchased 22 percent of all failed-bank assets.) The 

investors brought $5.6 billion in capital to the industry. 

Aggregate Results for Resolutions during the Crisis 

Table 6.3 summarizes the use of the different strategies deployed by the FDIC from 2008 

to 2013. The failed banks are grouped into five categories: (1) Washington Mutual Bank 

(WaMu), (2) other whole-bank P&A,57 (3) loss-share P&A,58 (4) other P&A,59 and (5) 

payout and DINB.60 For failed banks that were placed into bridge banks before resolution, 

the final resolution method was used for categorization. 

Of the $686 billion in assets resolved over the course of the crisis, $307 billion (45 

percent) were the assets of WaMu. The second-largest bank that failed was IndyMac ($30 

billion, or 4.5 percent). 

Early in the crisis, loss-share transactions increased quickly, going from 2 in 2008 to 91 

in 2009, and from 2009 to 2011 they made up a larger number of resolutions than all other 

strategies combined. The number of loss-share resolutions peaked in 2010 and dropped 

substantially in 2012 and 2013. In every year of the crisis except 2008 and 2012, however, 

loss share was used to resolve the majority of failed-bank assets. In all, excluding WaMu, 

loss-share transactions were used for 62 percent of the failed banks and 82 percent of failedbank assets. The heaviest use of other P&A and payout/DINB resolutions was made during 

2009 and 2010, the most challenging years of the banking crisis. 

56 See FDIC, “FDIC Expands Bidder List for Troubled Institutions,” Press Release PR-127-2008, November 26, 

2008, https://www.fdic.gov/news/news/press/2008/pr08127.html. 

57 WaMu was a whole-bank P&A but is reported separately because of its size and unique characteristics. 

“Other whole-bank P&A” is all P&As (WaMu excluded) where 90 percent or more of assets were passed to 

the acquirer and no loss-share coverage was provided. 

58 P&A where loss share was provided on any assets at resolution, regardless of the share of assets passed to 

the acquirer. 

59 P&A that was not loss share or whole bank. It includes basic P&As, loan pools, and other combinations. 

60 DINBs are described above in the introduction to the section titled “Franchise Marketing: The Bidding 

Process and Resolution Options.” 
200 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Table 6.3. FDIC Bank Resolutions by Resolution Type, 2008–2013 

(Dollars in Billions) 

Resolution Type 2008 2009 2010 2011 2012 2013 Total 

WaMu 

Number 1 1 

Assets $307.0 $307.0 

Other Whole Number 1 13 14 23 15 12 78 

Bank P&A Assets $0.1 $1.7 $2.0 $5.4 $2.3 $1.4 $12.9 

Number 2 91 130 58 20 3 304 

Loss Share P&A 

Assets $16.5 $174.2 $86.8 $26.4 $4.8 $3.4 $312.1 

Number 20 25 6 9 12 8 80 

Other P&A 

Assets $17.7 $12.9 $1.0 $2.3 $3.4 $1.2 $38.4 

Number 10 9 2 4 1 26 

Payout/DINB Assets $6.8 $7.1 $0.9 $1.1 $0.0 $15.9 

Number 24 139 159 92 51 24 489 

Total 

Assets $341.2 $195.7 $96.8 $34.9 $11.6 $6.0 $686.3 

In terms of resolution costs, the several resolution strategies fared very differently. 

Table 6.4 summarizes FDIC losses by resolution type.61 

Table 6.4. FDIC Losses by Resolution Type, 2008–2013 

Number Total Total Cost Loss Rate (Cost/Assets) 

of Assets to FDIC Weighted 

Resolution Type Failures ($ Billions) ($ Billions) Mean Mean Median 

P&A 

Washington Mutual 1 307.0 0.0 0.0% 0.0% 0.0%

 Other Whole Bank 78 12.9 2.2 16.8% 23.0% 23.4%

 Loss Share 304 312.1 56.8 18.2% 22.3% 21.6%

 Other 80 38.4 9.3 24.3% 33.9% 34.1% 

Total P&A 463 670.4 68.3 10.2% 24.4% 23.3% 

Payout/DINB 26 15.9 4.4 27.4% 33.2% 34.7% 

Total 489 686.3 72.7 10.6% 24.9% 23.6% 

Note: Assets are as of the final Call Report filed by the failed bank. Loss estimates are as of year-end 2016. 

The weighted mean loss rate is weighted by assets. Systemic failures are excluded. 

61 The resolution costs reported here are as of year-end 2016. These estimates include undiscounted activity 

through year-end 2016 plus estimated future activity discounted to year-end 2016. For additional discussion,

see Rosalind Bennett and Haluk Ünal, “Understanding the Components of Bank Failure Resolution Costs,” 

Financial Markets, Institutions and Instruments 24, no. 5 (2015): 349–89. 
CHAPTER 6: Bank Resolutions and Receiverships 201 

WaMu resulted in no loss to the DIF. Total resolution costs over the crisis were 

$72.7 billion and represented 10.6 percent of total assets at failure (including WaMu); 

excluding WaMu, losses represented 19.2 percent of total assets.62 Also excluding WaMu, 

loss-share P&A had the lowest mean and median loss rates, and whole bank had the 

lowest weighted average loss rate. The loss rates for other P&A were similar to those for 

payouts and DINBs. Note that studies have found that the relative condition of the failed 

bank influences the resolution type that is used at failure. This phenomenon, called 

“selection bias,” was documented during earlier periods but has not been estimated for 

the 2008–2013 crisis.63 One should therefore interpret the results in Table 6.4 carefully 

because some (or possibly all) of these cost differences may be attributable to differences 

in financial condition. To gain additional insight, see Table 6.5, which provides selected 

financial condition indicators by resolution type. 

Table 6.5. Selected Condition Indicators by Resolution Type 

(Averages as of Final Call Report Filed before Failure) 

Resolution Type 

Number of 

Banks 

Noncurrent 

Loan Ratea Brokered to Total ADC Loans to 

Domestic Deposits Total Loansb 

Equity to 

Assets 

P&A 

Washington Mutual 1 4.1% 18.1% 1.8% 7.9%

 Other Whole Bank 78 12.7% 3.8% 10.3% 1.3%

 Loss Share 304 16.8% 9.6% 21.0% 1.2%

 Other 80 19.4% 16.0% 25.7% 1.8% 

Total 463 16.6% 9.8% 20.0% 1.3% 

Payout/DINB 26 15.1% 25.7% 23.9% 1.8% 

a The sum of nonaccrual loans plus loans 90+ days delinquent, divided by total loans. 

b ADC stands for Acquisition, Development, and Construction. 

WaMu had a capital ratio (that is, the ratio of equity to assets) of 7.9% and a noncurrent 

loan rate of 4.1%. For the other groups, capital ratios were lower and noncurrent rates 

62 If IndyMac were also excluded, the loss rate drops to 17.3 percent. This compares with a loss rate of 12.7 

percent for FDIC resolutions from 1980 to 1994, and 25.2 percent for thrift resolutions (by the FSLIC and the 

RTC) from 1980 to 1994. Because (1) failed thrifts held more real estate loans than did failed banks during 

the 1980–1994 period, and (2) real estate loans were the primary driver of losses during the 2008–2013 crisis, 

one might conclude it would be likely that losses during the recent crisis would be similar to thrift losses 

during the earlier one. However, this was not the case: the thrift losses in the earlier period were exacerbated 

by closure delays on the part of the FSLIC and by the inadequate financial resources of both the FSLIC and 

the RTC. 

63 See Rosalind Bennett and Haluk Ünal, “The Effects of Resolution Methods and Industry Stress on the 

Loss on Assets from Bank Failures,” Journal of Financial Stability 15 (December 2014): 18–31; and James 

A. Berkovec and Nellie J. Liang, “Selection in Failed Bank Auction Prices: An Econometric Model of FDIC 

Resolutions,” Federal Reserve Board Finance and Economics Discussion Series 93-40, 1993. 
 

202 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

were higher. The whole-bank P&A without loss share had a noncurrent rate of 12.7%, 

and brokered deposits constituted 3.8% of deposits. The payout/DINB group had the 

highest level of brokered deposits (25.7%), and other P&A had the worst noncurrent rate 

(19.4%) and the highest concentration of ADC loans (25.7%). It seems likely, then, that the 

condition of the banks within each category contributed to the differences in the FDIC loss 

rates shown in Table 6.4. Even so, the FDIC estimated that the loss-share transactions saved 

$42 billion, or 13.6 percent of total assets, compared with the estimated cost of a payout.64 

As shown in Table 6.4, the loss-share bank failures cost the FDIC an estimated total of 

$56.8 billion. As of year-end 2016, the FDIC had paid $29.5 billion in loss-share payments, 

and total loss-share payments were expected to be $31.4 billion, or 55 percent of the total 

loss. Most of the remaining costs were related to the asset discounts that were part of the 

bids submitted by acquirers. Although the total asset discount for the loss-share bank 

failures amounted to $30.1 billion (which represents the sum of all acquirers’ bids for 

their transactions), the FDIC’s related losses were somewhat lower than that.65 Unlike 

the loss share payments, the losses related to the asset discount were insensitive to future 

asset price changes. As of year-end 2016, no true-up payments had been made on the 215 

transactions with true-up provisions, but the FDIC anticipated receiving $837 million in 

true-up payments to offset these losses.66 

Receiverships: Staffing and Infrastructure, Interactions and Trade-Offs 

Although franchise marketing is a key component of the FDIC’s resolution activities, it is 

just the first step in the receivership process that winds up the affairs of failed banks. A few 

of the main receivership tasks undertaken during the crisis are the subject of this section 

of the chapter. Those activities (plus other activities that are not discussed here) 67 require 

64 The cost savings estimate was calculated as the difference between the resolution cost and the payout cost, 

divided by the payout cost, based on the least-cost test estimates for the loss-share resolutions at the time of 

resolution. Therefore, the estimate does not consider subsequent asset price movements or other changes 

that may influence the cost of the loss-share transactions or payouts. It also does not consider the possibility 

that the FDIC could have resolved the banks using methods other than loss share or a payout. 

65 In many cases, the acquirer would receive cash or would purchase more assets than the liabilities that it 

assumed, or both. In other cases, including some of the largest loss-share transactions, the relationship 

between the asset discount and the FDIC’s loss was more complicated, but the FDIC’s loss generally 

amounted to 80 to 100 percent of the asset discount. 

66 There were additional expenses and recoveries as well, but these were small in comparison with the lossshare payments and the asset discounts. On true-up payments, see the beginning of the section above titled 

“Evolution of FDIC Franchise Sale Offerings.” Some early termination payments were probably influenced 

by anticipated future true-up payments. As of year-end 2016, true-up payments were expected from 64 

percent of the outstanding loss-share agreements that included true-up provisions. 

67 Among the important tasks not discussed are accounting, reporting, deposit insurance determination, 

receivership liability management, contract management, legal claims, and enforcement. 
CHAPTER 6: Bank Resolutions and Receiverships 203 

substantial staffing and infrastructure to execute well, and so this section begins with a 

discussion of the FDIC’s staff at the onset of the crisis and the process that was followed to 

develop the necessary resolution and receivership infrastructure to manage the workload. 

The section goes on to discuss strategic considerations: interactions and trade-offs. 

Staffing and Infrastructure 

As noted above, the events in the last half of 2008 and the corresponding rise in 

resolution activity were more severe and—importantly—unfolded more quickly than 

the FDIC’s planning efforts had envisioned. The plans anticipated that individual large 

banks would fail quickly but did not anticipate either the number of large-bank failures 

or the increased speed of small-bank failures. Figure 6.3 compares the 1980–1994 crisis 

with the 2008–2013 crisis in terms of the speed and extent of failures. 

Figure 6.3. Failed Banks as a Percentage of All Banks by Year from Start of Each Crisis 

Percent 

4 

3.5 

0 

0.5 

1 

1.5 

2 

2.5 

3 

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 

Years from Start of Crisis 

1980–1994 2008–2013 

Failure rates increased much faster during the 2008–2013 crisis: by 2009, the second year 

of the recent crisis, almost 2 percent of banks had failed—a rate that was not reached until 

the previous crisis was past its eighth year. The difficulty of keeping pace with the speed 

at which the recent crisis unfolded imposed costs on the FDIC. In some cases the costs 

were relatively minor, such as when the accounts payable function fell behind in paying 

bills, which it did for several receiverships. In other cases, the costs were potentially more 

substantial. For example, some assets might have lost value because asset management 
204 

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2011Q1

2011Q2

2011Q3

2011Q4 

CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

resources were overtaxed. In addition, the FDIC’s staffing challenges were always kept 

in mind when decisions were being made about resolution offerings to potential bidders. 

In June 2008, the FDIC increased its authorized staff for the Division of Resolutions and 

Receiverships (DRR) from 227 to 339. By September 2008, the total authorized DRR staff 

stood at 825, but the actual on-board DRR staff was only 259. The hiring of additional staff 

became a priority, and the FDIC dedicated resources to building its staff.68 Even so, it took 

time to search for, hire, and train new staff while also abiding by the various procedures 

and mandates related to hiring federal employees. Looking ahead to the “Lessons Learned” 

section, one can see that more-robust pre-crisis readiness planning may help reduce such 

delays in the future.69 Figure 6.4 represents total authorized and on-board DRR staff 

during the first four years of the crisis. 

Figure 6.4. Total DRR Authorized and On-Board Full-Time Staff, 2008−2011 

Number of Staff 

2,750 

2,500 

2,250 

2,000 

1,750 

1,500 

1,250 

1,000 

750 

500 

250 

0 

Authorized On-Board 

The FDIC eventually reviewed more than 25,000 applications for DRR positions, 

and in 2011, when DRR staffing was at its peak, the Division had more than 2,100 

employees—an almost tenfold increase from the number at year-end 2007. To reduce 

the kind of staff disruption and layoffs that had occurred during and after the 1980– 

1994 crisis, the FDIC hired mostly temporary employees. Of the total DRR staff at its 

peak, over 80 percent were temporary employees. 

68 Note that DRR received critical support from other divisions, especially in the legal and administrative areas. 

These other areas, as well as the bank supervision area, were also stretched thin as the crisis ramped up, and 

thus the staffing efforts extended beyond DRR. 

69 For example, new organization charts and position descriptions could be drafted and approved ahead of 

time as part of a readiness plan. 
CHAPTER 6: Bank Resolutions and Receiverships 205 

More than 60 of the employees were rehired annuitants. The plan to rehire annuitants 

was one part of the FDIC’s readiness planning that proved to be particularly beneficial 

because these highly seasoned retirees were able to immediately begin contributing to 

receivership activities. In contrast, the Corporate Employment Program did not work as 

designed. The CEP assumed that many of the employees who would be shifted to resolution 

tasks would come from the supervision area. However, as resolution activity began to 

increase, the workload of other divisions—including supervision—also increased, so that 

the realignment of resources was inhibited. (See chapter 4 for additional discussion.) 

Much like the consolidated offices established during the 1980–1994 crisis, regional 

temporary satellite offices (TSOs) were established in the 2008–2013 crisis. Their primary 

tasks were managing resolution and receivership activities and selling any retained 

assets related to failed financial institutions in their geographic area of responsibility.70 

The opening of the first TSO was authorized by the FDIC in November 2008, and took 

place three months later, in California. Two additional TSOs were subsequently opened: a 

Florida office in August 2009, and an Illinois office in May 2010. 

The use of TSOs allowed for easier coordination during bank failures: they improved 

FDIC communication with the staff of the failed institution and with acquirers, borrowers, 

and creditors; and they reduced travel costs. They also improved the FDIC’s hiring options 

because they were located in areas with large numbers of finance professionals seeking 

work. In contrast to what had happened during the 1980–1994 crisis, the TSOs were closed 

as planned. The temporary staff began to decline in 2011. The California TSO closed in 

January 2012, the Illinois TSO in September 2012, and the Florida TSO in April 2014. 

Staffing was one concern, and infrastructure was another. Infrastructure here refers to 

two things: enhanced information technology (IT) capability, and the use of contractors. 

The FDIC’s readiness planning had included building an enhanced IT infrastructure, 

and the Corporation improved its ability to market failing depository institutions by 

establishing virtual data rooms (VDRs) that streamlined the process of providing 

information to potential acquirers of failed banks.71 This change proved to be 

instrumental in the effective marketing of failed institutions, and without such a precrisis investment it would have been much harder to successfully sell as many failed 

institutions. A new general ledger was introduced in 2005, and in 2007 the FDIC 

implemented a new franchise marketing and asset management tool and began 

developing a new insurance determination system. Some of these IT investments were 

more successful than others. The unexpected size and speed of the 2008–2013 crisis 

challenged the design and capacity of some of the updated IT infrastructure, which had 

70 FDIC Board Resolution 11-08 No 077274. 

71 VDRs are electronically accessed data repositories that provide potential bidders with access to financial 

data on the failing institution, legal documents, information on the due diligence process and on bidding 

procedures, and descriptions of the resolution transactions being offered. 
206 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

been built for a slower-developing and smaller crisis.72 These experiences emphasized 

the importance of scalability in the designing of IT systems and the associated business 

processes related to resolutions and receiverships. 

Another key component of the FDIC’s resolution infrastructure was the extensive 

use of contractors throughout the 2008–2013 crisis. Early in the crisis, when staffing 

was especially thin, the use of contractors was an essential part of the FDIC’s failureresolution process. However, the contract review process was overtaxed, and it quickly 

became apparent that the contracting arrangements in place as of year-end 2007 were 

insufficient for the volume and type of work required. In addition, the time frame to 

approve new contracts or to modify existing contracts under FDIC’s delegations of 

authority was not conducive to supporting the volume of failures that the FDIC faced 

early in the crisis. (Delegations of authority define the levels of FDIC management that 

are authorized to approve various actions. For example, contracts above $10 million 

might require approval by the FDIC Board of Directors.) Thus, several adjustments were 

made to provide timely contractor services that could keep pace with the number of 

failures. These adjustments included entering into many more contracts, expanding the 

sizes of contracts, and adjusting the delegations of authority. 

In addition, the FDIC built up its contract oversight process. To manage the rapidly 

expanding workload, it was necessary to hire and train Contract Oversight Managers 

at a very fast pace. The FDIC developed and implemented new contractor evaluation 

metrics, established contractor performance evaluations to assess current contactors 

or to award future contract tasks, created automated systems for compiling contractor 

metrics, and streamlined the process of getting contractors on board. In 2010, the FDIC 

established a central contract oversight group that supervised most of the Corporation’s 

receivership contracts. 

Once an adequate set of contracts was in place and capacity was increased, the FDIC’s 

overall experience with the use of contractors was positive. The contracts supported a wide 

variety of tasks, including accounting, financial reporting, investigations, loan servicing, 

real estate management, asset sales, specialized asset sales, information technology services, 

data analysis, reviews of compliance with loss-share agreements, and asset valuation. Over 

the course of the crisis, however, the need for contractors diminished. In 2008, contractor 

expenses made up 60 percent of total receivership expenses, but as the FDIC staff was 

built up, expenditures on contractors gradually fell. In 2013, contracting costs made up 32 

percent of total receivership expenses. 

The staffing, IT, and contracting resources that were developed during the crisis 

supported numerous resolution and receivership activities, some of the most important 

of which were related to the management and disposition of the assets that were 

retained in receivership. 

72 In addition, there were delays in developing the insurance determination system; it was completed in 2010. 
CHAPTER 6: Bank Resolutions and Receiverships 207 

Strategic Considerations: Interactions and Trade-Offs 

All assets that are retained in a receivership have to be liquidated (sold) according to the 

principles stipulated in FDICIA: 

[T]he Corporation shall conduct its operations in a manner which— 

(i)	 maximizes the net present value return from the sale or disposition of such 

assets; 

(ii)	 minimizes the amount of any loss realized in the resolution of cases; 

(iii) ensures adequate competition and fair and consistent treatment of offerors; 

(iv) prohibits discrimination on the basis of race, sex, or ethnic groups in the 

solicitation and consideration of offers; and 

(v)	 maximizes the preservation of the availability and affordability of residential 

real property for low- and moderate-income individuals.73 

Within this broad mandate, the FDIC has considerable flexibility in formulating asset 

liquidation strategies, but it also must consider a number of inherently contradictory goals 

and make a number of trade-offs. These trade-offs are discussed below. They are always 

considered in the context of the need to make the three basic choices that influence the 

returns from receivership sales: how quickly to sell; what sales method to use; and how 

to service the assets before they are sold. And these decisions are interdependent. For 

example, if the FDIC chooses sales methods that require a long preparation time before 

the assets are sold, then the FDIC must stand ready to manage a large portfolio of assets 

during crisis periods (because as existing assets are prepared for sale, others will come in 

and the total number and value of assets in receiverships will build up). Therefore, the 

FDIC must consider all three aspects of its asset sale process—how quickly, what method, 

and how to service—as it makes decisions about retained asset sales and management 

and how best to meet the statutory requirements. 

As noted in the “Background” section early in the chapter (in the subsection titled “Past 

Strategy”), after its experience in the crisis of 1980 to 1994, the FDIC sought to return retained 

assets to the private sector quickly. However, the economic environment in 2008 through 

2013 made this hard to do without incurring significant losses. This difficulty highlights an 

inherent trade-off when it comes to speed in asset sales. On the one hand, quick sales avoid 

potential inefficiencies and costs associated with government asset management; these 

inefficiencies could include weaker incentives to maximize asset recoveries (compared 

with incentives in the private sector),74 additional loan servicing transfer costs,75 and more73 12 USC § 1821(d)(13)(E). See also 12USC § 1823(d)(3)(D). 

74 Researchers have suggested several reasons for weakened incentives if the government manages assets. For 

additional discussion, see William L. Megginson et al., “The Choice of Private versus Public Capital Markets: 

Evidence from Privatizations,” Journal of Finance 59, no. 6 (2004): 2835–70. 

75 A loan servicing transfer is a change in the company that processes loan payments. These companies 
208 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

costly audit and review processes (compared with the private sector).76 Further, as noted 

above, the accumulation by the government of a substantial share of assets may cause an 

asset overhang problem that could cause private investors to defer asset purchases in the 

belief that prices will drop in the future.77 On the other hand, if a liquidating entity like the 

FDIC sells assets quickly in a downturn, it may obtain poor prices for even high-quality 

assets, as competition for asset sales is weak and potential buyers with the best ability to 

maximize asset values might lack the resources needed to bid on the assets.78 Thus, buyers 

would be likely to expect to get bargains and would bid accordingly. Moreover, when asset 

markets are experiencing fire sales,79 the quick sale of significant amounts of retained assets 

by a large entity like the government may worsen market conditions. Because the effects 

of quick asset sales vary substantially with market conditions and because the FDIC sells 

assets during periods of both good and bad market conditions (but mostly when markets 

are weak), the FDIC’s best strategic choices may change as market conditions shift. 

In addition to questions about the timing of asset sales, the FDIC must consider the 

best method of selling assets. The FDIC relied heavily on competitive auctions for its 

sales of retained assets.80 Researchers have found that the best choice of auction format 

depends on the situation (e.g., market conditions, asset characteristics) in which the 

collect loan payments, maintain loan records, collect and pay insurance and taxes related to loans, and 

follow up on loan delinquencies. They charge fees to take on new assets. In addition to the fees, loan 

servicing transfers may impose indirect costs, such as lost information or delays or miscommunications in 

addressing delinquencies. The number of loan servicing transfers is reduced if assets are sold at or shortly 

after resolution. 

76 Governments inevitably face more public scrutiny than private companies. For additional discussion, see 

Seidman, Full Faith and Credit. 

77 See the subsection “Past Strategy” for a description of an asset overhang, and see note 14 for related literature. 

78 See Andrei Shleifer and Robert W. Vishny, “Liquidation Values and Debt Capacity: A Market Equilibrium 

Approach,” Journal of Finance 47, no. 6 (1992): 1343–66; also Joao Granja, Gregor Matvos, and Amit Seru, 

“Selling Failed Banks,” Journal of Finance 72, no. 4 (2017): 1723–84. 

79 A fire sale is a sale in which a financially constrained asset holder sells an asset for less than its true 

value because the holder needs cash right away. During the 2008–2013 crisis, the prevalence of fire 

sales led several types of assets to lose value very quickly. Fire sales were also exacerbated by a lack of 

financing options for potential buyers. For more details, see Andrei Shleifer and Robert W. Vishny, 

“Fire Sales in Finance and Macroeconomics,” Journal of Economic Perspectives 25, no. 1 (2011): 29– 

48; Markus K. Brunnermeier, “Deciphering the Liquidity and Credit Crunch 2007–2008,” Journal of 

Economic Perspectives 23, no. 1 (2009): 77–100; Turmoil in U.S. Credit Markets: Recent Actions Regarding 

Government Sponsored Entities, Investment Banks and Other Financial Institutions, Before the Senate 

Banking, Housing, and Urban Affairs Committee, 110th Cong. (September 23, 2008) (testimony by Henry 

M. Paulson Jr., Secretary of the Treasury), https://www.gpo.gov/fdsys/pkg/CHRG-110shrg50400/html/ 

CHRG-110shrg50400.htm; and Timothy F. Geithner, Stress Test: Reflections on Financial Crises (2014). 

80 Other options include selling assets at a fixed price, negotiating with borrowers to recover funds, 

negotiating sales with potential buyers, or, for performing loans, holding assets and collecting the 

payments. 
CHAPTER 6: Bank Resolutions and Receiverships 209 

auction will be held. 81 In practice, it can be hard to identify the ideal auction format, but 

the FDIC used a variety of auction formats in response to the circumstances it faced. 

The FDIC also faces decisions and trade-offs associated with the terms of the sale. A 

basic question is whether to sell the asset outright or retain some risk in hopes of higher 

prices. For some of its sales of retained assets, the FDIC set terms that shared risks with the 

buyer (that is, where the FDIC and the buyer shared future asset losses and recoveries). 

More specifically, the FDIC’s securitizations82 and limited liability companies83 included 

risk-sharing provisions. Like the use of P&A agreements with loss share for franchise 

sales, these risk-sharing sale methods have the potential to improve prices—but the FDIC 

could lose money after the sale if asset values drop or if the assets are not well managed. 

In addition, these risk-sharing options require oversight after the sale is complete, and 

the costs associated with the oversight function are large enough that asset sales with 

risk-sharing are not cost-effective for small amounts of assets. In contrast, selling assets 

outright is simpler to execute and reduces the FDIC’s risk exposure immediately, thereby 

eliminating the need for oversight. 

Several characteristics of the economic environment during the crisis made the risksharing of assets attractive to buyers: the sudden and steep deterioration in some asset 

markets at the beginning of the 2008–2013 crisis, the accompanying uncertainty about asset 

values,84 and the lack of good information about some failed-bank assets. But if the terms 

of these transactions are not properly designed, risk-sharing can weaken the incentive for 

buyers to manage assets well. Good contract design and monitoring processes are therefore 

vital to the success of this strategy. 

The question of how to service assets is primarily focused on loans because most 

retained assets are loans and, as described below, the servicing of loans is a complex 

task. On the servicing question, the FDIC chose not to hire contractors to do both the 

loan servicing and the loan sales (which is a method that was used in the 1980–1994 

81 Numerous authors have found connections between asset sale processes (and especially auction formats) 

used by sellers of assets and the resulting sales revenue. See, for example, Paul Klemperer, “Auction Theory: 

A Guide to the Literature,” Journal of Economic Surveys 13, no. 3 (1999): 227–86; Vijay Krishna, Auction 

Theory (2009); and Guhan Subramanian, Negotiauctions: New Dealmaking Strategies for a Competitive 

Marketplace (2010). However, much of the research involves theoretical analyses that do not fully capture 

the circumstances faced by the FDIC as it makes decisions about auction formats. 

82 Securitization is the process of creating one or more securities that are collateralized by a pool of 

other financial assets and are then sold to investors. The sections below titled “Sales of Securities” and 

“Securitizations” describe the FDIC’s securitization activities during the crisis. 

83 A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability features 

of a corporation and the tax efficiencies and operational flexibility of a partnership. The section below titled 

“Limited Liability Companies” describes the FDIC’s LLC activities during the crisis. 

84 Nicholas Bloom, “The Impact of Uncertainty Shocks,” Econometrica 77, no. 3 (2009): 623–85, found that 

increases in uncertainty have been accompanied by decreases in investment, while Bloom et al., “Really 

Uncertain Business Cycles,” NBER Working Paper Series 18245, 2012, found that uncertainty rises during 

recessions and could be an important driver of business cycles. 
 

210 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

crisis) because of the challenges of designing good contract incentives.85 The other 

options for servicing retained loans are discussed in more detail below (in the section 

titled “Asset Servicing”). 

Receivership Tasks during the Crisis 

Any discussion of receivership tasks during the 2008–2013 crisis must begin with the 

dimensions of the FDIC’s receivership responsibilities during that period and then with 

the particulars of what was entailed in servicing assets at that time. The environment 

and the particulars of what had to be done lead directly to the methods the FDIC used 

for selling retained assets and to decisions about which methods would be best for which 

asset type: the trade-offs discussed above can be seen influencing the FDIC as it decided 

on the best way to manage and sell the assets it held in receivership. Finally, this section 

discusses one important receivership task that did not have to do with selling retained 

assets but, instead, followed directly from decisions made during franchise marketing: 

the administration and oversight of loss-share P&As.86 

The Dimensions of the FDIC’s Receivership Responsibilities during the Crisis 

As of year-end 2007, the FDIC was managing only $800 million of assets that were 

retained in receiverships, but by year-end 2008 that number had risen to $15.1 billion. 

Figure 6.5 shows certain key types of assets held for liquidation for the years 2008 through 

2013. During that period, the FDIC managed a total of $87.5 billion in assets from 492 

failed depository institutions.87 

The volume of receivership assets peaked in 2009 and then steadily decreased. The 

reduction in receivership assets was the result of several factors. The failure rate stabilized 

and then fell after 2010, and compared with 2009, the volume of new assets that were 

retained in receivership at resolution dropped somewhat in 2010 and substantially after 

2010, as the asset size of the failed banks fell. As the failure rate stabilized, the FDIC 

continued to liquidate its previously acquired assets, reducing the total number of assets 

in liquidation. Moreover, in more than 60 percent of failures during the 2008–2013 crisis, 

85 See FDIC, Managing the Crisis, 333–71, for additional discussion of the importance of incentives in these 

types of contracts and the related challenges. See also Resolution Trust Corporation, “Hard to Sell Asset 

Review Project,” 1992. 

86 As noted previously, a number of important tasks are not discussed in this chapter, including accounting, 

reporting, deposit insurance determination, receivership liability management, contract management, legal 

claims, and enforcement. 

87 In addition to the 489 bank failures during the crisis period, there were a few receiverships from pre-crisis 

bank failures that were still open when the crisis began. 
211 

25 

20 

CHAPTER 6: Bank Resolutions and Receiverships 

the receiver did not retain any loans from the failed institution.88 From 2008 to 2016, the 

FDIC liquidated almost 95 percent of the assets that were retained in the 489 receiverships 

created during the crisis, and only $3.2 billion of the assets remained unsold. In addition, 

the FDIC had terminated 145 (30 percent) of the receiverships. 

Figure 6.5. Loans, ORE, and Subsidiaries in Liquidation, 2008−2013 

Billions of Dollars 

15 

10 

5 

0
 

2008 2009 2010 2011 2012 2013
 

Year
 

Multifamily Residential Loans Consumer Loans Other Real Estate 1-4 Family Residential Loans 

Subsidiariesa ADC Loans Commercial & Industrial Loans Other CRE Loans 

a Defined as companies held as subsidiaries of failed banks. 

Asset Servicing 

Most of the assets that were retained in receiverships during the crisis were loans, and for 

retained loans the FDIC as receiver undertook the associated servicing responsibilities 

previously held by the failed institution. Loan servicing included general loan 

administration tasks such as collecting payments and managing escrow accounts, but it 

also included more resource-intensive responsibilities such as monitoring delinquencies, 

managing defaulted loans, and approving loan or line of credit disbursements. Like 

private-sector institutions, the FDIC was subject to a large number of statutory and 

88 In other words, the acquirer purchased all the loans. 
212 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

regulatory requirements that set standards for loan servicing tasks.89 For foreclosed 

properties, servicing involved property management tasks such as maintaining the 

property, collecting rents, paying local taxes, and so forth. 

As part of receivership planning, the FDIC began analyzing loans that required special 

attention, such as unfunded and partially funded lines of credit, and ADC loans.90 In 

some cases, decisions to extend additional credit were a matter of policy. For example, 

the FDIC advanced additional credit to a wilderness farm that would otherwise have 

lacked the necessary funds to provide food for its animals. Many funding decisions 

were time sensitive, and it was important for the FDIC to have the capabilities to 

make prompt decisions about extensions of credit. To that end, the FDIC had explicit 

delegated authority for determining whether to extend additional funds under a failed 

institution’s credit facility. 

In the years between the 1980–1994 crisis and the most recent crisis, the FDIC had 

established the internal goal of placing 90 percent of the marketable loans retained in 

receivership in a sales initiative within 90 days of the failure date (and another internal 

goal of terminating receiverships [in the absence of specific impediments] within three 

years).91 In those interim years, when an institution failed, the FDIC generally managed 

and sold the loans from a field receivership site that was established at the failed bank’s 

location. The FDIC was usually able to sell all, or almost all, of the retained loans from 

the receivership site at reasonable prices within three months. The FDIC would continue 

to operate the necessary IT systems that had been used by the failed institution and 

would retain enough staff members from the failed institution to service the assets 

until they were sold. This strategy was economical, and it allowed the FDIC to close the 

receivership field site promptly and avoid costly loan servicing transfers.92 

As the crisis began to unfold, however, the FDIC no longer received bids that met 

its price expectations on its bulk loan sales that occurred immediately after failure. For 

example, bidders were offering 30 to 50 cents on the dollar for performing loans that, 

in better times, had sold at or close to par. Consequently loans were not sold and field 

receiverships remained open for an extended time—upward of a year or even longer. 

The accumulation of assets at different receivership sites was expensive, and it became 

89 Relevant statutes include (but are not limited to) the Equal Credit Opportunity Act, the Truth in Lending 

Act, the Small Business Regulatory Enforcement Fairness Act, the Service Member’s Civil Relief Act, the Fair 

Debt Collections Practices Act, and the Fair Credit Reporting Act. 

90 FDIC, “A Borrower’s Guide to an FDIC Insured Bank Failure,” https://www.fdic.gov/bank/individual/ 

failed/borrowers/. 

91 See FDIC, “Annual Performance Goals,” 2008. (“Percentage of failed institution’s assets marketed: 90 

percent of the book value of a failed institution’s marketable assets is marketed within 90 days of failure.”) 

For details on the FDIC’s current strategic goals, see FDIC, “Strategic Plans,” https://www.fdic.gov/about/ 

strategic/. 

92 See note 75 for a definition of a loan servicing transfer and a discussion of the related costs. 
CHAPTER 6: Bank Resolutions and Receiverships 213 

increasingly difficult to manage the overall portfolio or to take advantage of opportunities 

to coordinate sales of assets across receiverships.93 Therefore, the FDIC shifted to a policy 

of transferring retained loans to national servicers94 within 90 days of an institution’s failure 

(at least for loans that were not expected to sell quickly from the receivership field site at 

reasonable prices).95 The national servicers collected information on the receivership loans 

on-site, which reduced costs and improved data quality. After 2010, the FDIC began to 

rely heavily on national servicers as its primary asset managers. As a result of the switch to 

national servicers, the average time the FDIC remained on-site at a failure decreased from 

more than a year to about 115 days. 

Asset Sales by Type of Asset 

Because the types of assets that needed to be sold influenced both the FDIC’s decisions 

about sale methods and the markets into which the retained assets were sold, the FDIC 

generally organized its sales efforts by asset type. The three asset types whose sales are 

discussed here are securities, loans, and ORE. 

Sales of Securities. In most cases, the acquiring institution assumed the failed institution’s 

holdings of U.S. Treasuries, municipal securities, and similar investment-grade securities. 

The FDIC usually offered the other securities from the failed institution to potential 

acquirers as part of the franchise sale at resolution, but often potential acquirers were not 

interested in purchasing risky, illiquid securities and priced them accordingly. Thus the 

FDIC retained many illiquid, hard to price, and complex securities in its receiverships. 

For disposal of the more liquid securities, competitive auctions to qualified bidders 

were conducted by in-house staff, sometimes with the assistance of a financial advisor 

under contract to the FDIC. This method was typically used for agency debt, agencyissued mortgage-backed securities, and municipal securities—all of them where 

potential bidders could use prices paid for other recent sales to inform their bids.96 

93 The average cost of maintaining an open receivership site, including rent, receivership assistance contracts, 

and payroll services contracts, was about $500,000 per month. Many of the costs did not decline even as 

the number of outstanding assets declined. In addition, failed-bank staff members or general-purpose 

receivership contractors were not always highly skilled in asset management. Moreover, it was hard to 

develop and maintain accurate, up-to-date asset listings for all the assets in receivership when assets were 

being serviced at a large number of open receivership sites. 

94 National servicers are servicers and private firms that specialize in loan servicing and have a national (rather 

than local) scope. 

95 Currently the decision as to whether the loan portfolio can be sold quickly on-site or whether it is moved to 

a national servicer for a structured transaction is made on a case-by-case basis. If the FDIC can obtain about 

the same price for a loan sale made on-site right after failure as it can with later sales from a national servicer 

(possibly using a structured transaction), it is advisable to sell from the receivership site, which—when a 

quick sale at a market price is feasible—has lower management costs compared with the cost of using a loan 

servicer. 

96 Likewise, the FDIC could use recent asset prices to set reserve prices (that is, the minimum price that the 
 

214 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

In situations where the FDIC liquidated securities with transfer restrictions, or in 

cases where there was a limited number of candidate purchasers for a specific asset, a 

negotiated sale was arranged.97 

The FDIC retained a substantial volume of private label mortgage-backed securities 

(PLMBS) that acquirers rejected. Because few investors were purchasing these types of 

assets at the time, the FDIC believed that the prices it could obtain in an auction would 

fall below the long-term value of the securities. Therefore, the FDIC used the PLMBS 

that were retained in receiverships to collateralize eight PLMBS securitizations that 

it issued in 2010.98 Seven were residential MBS and one was a commercial MBS. This 

strategy improved pricing and marketability because the FDIC provided a guarantee, 

backed by the full faith and credit of the U.S. government, for the senior tranche of each 

securitization.99 The securitizations had two features to help reduce the FDIC’s potential 

exposure under the guarantee. First, the senior tranche was overcollateralized, allowing 

the securitization to absorb substantial losses without triggering the FDIC guarantee. 

Second, the FDIC used interest earned on the underlying MBS to make payments toward 

the principal balance in the senior tranche. 

The PLMBS securitizations were considered a successful alternative to auctioning the 

securities in 2010. The principal balance of the PLMBS that were used to collateralize the 

FDIC securities was $6.35 billion. The FDIC estimated it would net $3.46 billion if it sold 

the PLMBS in 2010 through an auction. Providing a guarantee improved the securities’ 

marketability, and the face value of the securitizations sold was $4.2 billion. Additional 

proceeds from the securitizations, such as guarantee fees and increases in the value of 

retained interests, resulted in a projected recovery of $5.12 billion,100 which was 48 percent 

more than the estimated recovery from an auction at the time. As of year-end 2016, the 

outstanding face value of the FDIC securities was $1.06 billion, but the outstanding face 

value of the underlying securities was $2.82 billion. Any payments made on the underlying 

securities that were not needed to satisfy the FDIC securities would go to the receiverships. 

It is impossible to determine with certainty whether the securitizations were more 

advantageous than a strategy of holding the PLMBS for future auction would have been. 

The securitizations provided a substantial cash recovery in 2010, thus improving the 

FDIC’s cash position compared with what it would have been if a holding strategy had 

been used, and enabled the FDIC to receive much better prices than the prices that would 

FDIC would accept). These securities had low loss rates. 

97 For example, negotiated sales could be used for limited partnership interests, closely held securities, and 

securities with a “right of first refusal” restriction. 

98 After 2010, the FDIC did not acquire enough mortgage-backed securities to warrant further securitizations. 

A senior tranche is the least risky tranche in a securitization and takes losses only when all the other tranches 

have lost their full value. For a detailed explanation of securitization and tranches, see chapter 1. 

100 This figure includes the transaction cost associated with securitizations. 

99 
CHAPTER 6: Bank Resolutions and Receiverships 215 

have been achieved with a cash sale. Both approaches (securitization with a guarantee, 

and holding) required that the FDIC bear the full risk of further price deterioration, but 

holding the MBS might have allowed the FDIC to more fully participate in potential price 

improvements, receive slightly higher interest income, and avoid certain transaction costs. 

Sales of Loans. The FDIC retained over $50 billion in loans in its receiverships, and therefore 

the task of selling them was daunting. Moreover, there were many types of loans (ranging 

from small consumer loans to large commercial loans), and the quality of the loans varied 

(ranging from loans where the borrowers were routinely paying the loans on time, to loans 

that were in foreclosure proceedings). The FDIC used bulk sales to sell loans outright; 

in addition, it used two kinds of structured sales. Outright sales are when all aspects of 

ownership, including risk, are transferred from one party to another party. Structured sales 

are a form of joint ownership where multiple parties share not only the asset management 

responsibilities but also the benefits and costs of a pool of assets.101 The two kinds of 

structured sales the FDIC used were securitizations (defined in note 82 as “the process of 

creating one or more securities that are collateralized by a pool of other financial assets and 

are then sold to investors”) and limited liability companies (LLCs), which were the legal 

entities used to execute a type of joint venture that was used heavily during the crisis. 

—Bulk Sales. The FDIC routinely offered loans for bulk sale, in pools grouped by loan 

type, loan performance status, and/or geography; these types of sales are often called 

“bulk loan sales” or “whole loan sales.”102 The FDIC used third-party contractors to sell 

the loans, usually at an on-line sealed-bid auction.103 The contractor would provide 

Internet marketing, due diligence, imaging and indexing of files, pooling, an on-line 

bidding platform, and closing services for the sales. To encourage wide participation in 

the auctions, the FDIC sought potential buyers through many venues, and assets were 

marketed both through the FDIC’s public website and through the loan sale contractor’s 

website. Because of the challenges associated with estimating the value of many of these 

loans, the FDIC did not usually set reserve prices (that is, the minimum price that 

the FDIC would accept). Instead, it would monitor the extent of interest expressed by 

bidders (measured by the number of bids or the number of bidders who performed due 

diligence) to determine whether the winning bid constituted a true market price. 

101 Contracts enumerate the responsibilities, benefits, and costs for each party. Clearly, these sales are more 

complex than straightforward asset sales, called here “outright sales.” 

102 In locations where there were many loans for sale at the same time, the groups were more homogeneous. 

When the FDIC had fewer loans available for sale, the loan pools were more diverse. 

103 The FDIC’s sealed-bid process is a form of a “first price sealed bid auction,” where bidders submit bids to the 

auctioneer in such a manner that no other bidders know one’s bid—for example, in a sealed envelope. The 

bidder submitting the highest bid wins the object and pays what he or she bid. 
216 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

The FDIC sold $10.6 billion in retained assets using bulk loan sales; the loss rate for 

these loans was 49 percent.104 Bulk loan sales carried no retained risk for the FDIC and 

provided quick cash infusions at a time when the DIF’s cash balance was under pressure. 

Seller financing was never offered. Prompt loan sales limited the time during which the 

FDIC was required to service the retained loans. However, early in the crisis, relatively 

few buyers were interested in these loans (which were often viewed as high risk because 

they had been originated by failed banks), and the buyers who were interested often 

suffered funding constraints or were seeking bargains. Given the loss rates for cash loan 

sales of assets related to real estate, the FDIC found structured instruments (such as loan 

securitizations and LLCs, discussed below) to be an appealing alternative. 

—Securitizations. As the volume of unsold loans held in receiverships increased during 

the 2008–2013 crisis, the FDIC explored alternative disposition options, including loan 

securitizations. With the securitization market remaining largely frozen at the start of the 

2008–2013 crisis, the FDIC began to securitize loans with an FDIC guarantee, backed by 

the full faith and credit of the U.S. government, to increase the marketability and prices 

of its securitizations. From 2010 through 2013, the FDIC issued eight securitizations 

backed by $3.0 billion in loans; six transactions had an FDIC guarantee on the senior 

tranches. The total face value of the Class A securities (see next paragraph) was $2.2 

billion, or 73.9 percent of the collateral book value. 

After the FDIC identified and assembled loans for securitization, an underwriter 

recommended a securitization structure. For example, the first securitization issued was 

structured with three classes (the senior “A” tranche, the mezzanine “M” tranche, and 

the first loss “OC” tranche) as well as with residual certificates. For the securitizations of 

performing loans, the senior class (that is, the “A” tranche) typically accounted for 80 to 

85 percent of the overall capital structure and carried an FDIC corporate guarantee.105 

Generally, subordinate interests on the residential securitizations (all junior classes 

below the guaranteed senior tranches) were held by FDIC receiverships, with the 

option of marketing them at a later date. Subordinate-class certificates on commercial 

property transactions were sold to private investors at issuance. For both residential and 

commercial transactions, all residual certificates were retained by the FDIC. 

The FDIC Board of Directors approved each securitization before it was marketed. 

The FDIC drafted clauses in its securitization trust documents that were designed to 

reduce operational risk. Third-party contractors facilitated all aspects of the securitization 

transaction, including pricing, marketing, and settlement. Consistent with the improving 

asset markets, all of the transactions performed above original expectations. As of the end 

104 For additional details, see https://www.fdic.gov/buying/historical. 

105 For the two securitizations where most of the collateral was nonperforming loans (that is, loans where the 

borrowers were delinquent), the size of the senior tranche was less than half of the collateral balance and no 

guarantees were provided. 
CHAPTER 6: Bank Resolutions and Receiverships 217 

of 2016, one transaction had been unwound; 106 the outstanding face value of the class “A” 

securities had decreased by over 80 percent, to $395 million; and, $928.3 million in collateral 

remained outstanding, with payments due to the receiverships. Therefore, it appears highly 

unlikely that the FDIC will be required to make payments on any guarantees. 

The FDIC’s securitization program, in which a significant volume of loans were sold 

quickly, enabled the Corporation to improve its cash position. The FDIC was able to sell 

at reasonable prices, even when markets were in disarray, because it used its guarantee 

authority and retained the residuals; however, this also meant that the FDIC retained 

almost all of the risk exposure. The improving asset markets, as well as careful attention 

to contract design, contributed to the recoveries from these instruments and allowed the 

FDIC to avoid having to make guarantee payments. 

—Limited Liability Companies. As an alternative to bulk sales or securitizations, the 

FDIC used what are referred to as equity partnerships, Structured Transaction Sales, or 

LLC transactions.107 Whereas most of the loans that were securitized were of relatively 

high quality, most of the loans sold into Structured Transaction Sales were subperforming 

or nonperforming (that is, borrowers were delinquent or the loans had other problems). 

In a Structured Transaction Sale, the FDIC as receiver for one or more failed banks 

created a separate entity (the LLC) and then assigned assets to the LLC from one or more 

receiverships in exchange for all of the equity interest in the LLC. The FDIC then sold 

a portion of the LLC equity interest to a third-party investor that became the managing 

member of the LLC. Proceeds from the assets were paid to a custodian/paying agent, which 

distributed the proceeds to the FDIC and the investor according to the terms of the specific 

LLC agreement. When a large share of the assets had been liquidated, the LLC usually 

terminated with a bulk sale or the managing member’s buyout of the FDIC’s LLC interest. 

During the 2008–2013 crisis the FDIC entered into 35 Structured Transaction 

Sales, disposing of 43,315 assets with a book value of $26.2 billion. These Structured 

Transaction Sales disposed of approximately 30 percent of all assets unsold at bank 

resolution. The terms of each of the transactions were published by the FDIC.108 Of 

the Structured Transaction Sales, 20 (57 percent) held ADC loans, 8 (23 percent) held 

other CRE loans, and 7 (20 percent) held single-family mortgage loans.109 The average 

106 A transaction is unwound when the buyers of the FDIC securities have been paid in full and the security is 

extinguished. If, at that point, any of the loans that collateralized the securities have outstanding balances, 

then all the remaining payments made on the loans belong to the residual certificate holders—in this case 

the FDIC receiverships. 

107 As stated in note 83, an LLC is a hybrid type of legal structure that provides the limited liability features of a 

corporation and the tax efficiencies and operational flexibility of a partnership. The private-sector “owners” 

of an LLC are referred to as “members.” 

108 See FDIC, “Structured Transaction Sales,” https://fdic.gov/buying/historical/structured/index.html. 

109 Note that about $1 billion of the assets were ORE rather than loans. Almost all of the ORE related to 

foreclosed ADC loans. 
218 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

size of the ADC transactions was larger than the average size of the other types: ADC 

transactions constituted 65 percent of total LLC assets. 

In September 2009, after six sales, the FDIC revised the form of the LLCs to offer 

financing as an option. By providing seller financing when such financing was not 

generally available from private sources, the FDIC hoped to attract more investor interest 

and improve prices. On the basis of feedback from potential acquirers and a preliminary 

analysis of bids received, the strategy seemed to be successful. 

Table 6.6 provides information about the performance of these transactions. For each 

group of LLCs, four estimates of value are compared. The middle two columns aggregate 

estimates that were prepared by financial advisors shortly before the LLCs were created: 

they estimated the value of the assets if a cash sale were to be conducted or if an LLC were 

to be created. The last two columns aggregate estimates prepared by the LLC managing 

members (the companies that managed the LLCs). The “Initial” column reports the 

estimates that the managing members prepared shortly after each LLC was created, and 

the “June 2016” column reports the most recent estimates. 

Table 6.6. LLC Recovery Rates 

Number 

Initial Book 

Value 

Pre-Close Financial 

Adviser Estimate (%) 

LLC Managing Member 

Estimate (%)a 

Category of LLCs ($ Millions) Bulk Sale LLC Initial June 2016b 

FDIC Financing 

No 12 5,868.5 23.4 34.5 34.1 33.4 

Yes 23 20,306.6 31.9 42.5 42.2 51.5 

Asset Type 

ADC 20 17,001.3 24.4 36.1 33.5 43.7 

Other CRE 8 4,708.0 38.0 47.0 54.6 54.2 

SFR 7 4,465.8 42.8 51.5 51.2 54.7 

Overall LLC Program 35 26,175.1 30.0 40.7 40.3 47.4 

Median 490.7 33.5 41.6 42.0 42.5 

Mean 857.6 34.4 42.2 43.8 44.9 

Standard Deviation 828.6 14.5 13.8 14.8 15.5 

a Net present value of projected or actual cash flows as of the LLC sale date, divided by the initial asset 

balance. The discount rate is adjusted for risk using a method similar to the one used in the FDIC’s 

financial statements. Note proceeds are discounted at lower rates than equity distributions. b For the June 2016 estimate, over 90 percent of the cash flows are actuals rather than estimates. 

The aggregate across all LLCs showed that, on a program-wide basis, the estimated 

recovery from a bulk sale of the assets was 30 percent and the estimated recovery from 

an LLC sale was 40.7 percent. The managing members initially estimated a 40.3 percent 

recovery. The most recent estimates anticipate a 47.4 percent recovery. For 71 percent 
CHAPTER 6: Bank Resolutions and Receiverships 219 

of the transactions, the current estimates are higher than the original estimates.110 

On the basis of the pre-close estimates, the use of LLCs would have saved the FDIC 

an estimated $2.8 billion dollars (compared with bulk sale estimates); on the basis of 

the most recent estimates, the savings increased to $4.6 billion. Improvements in the 

asset markets probably contributed to the increased return. On the basis of this simple 

comparison, seller financing did not appear to influence the difference between the 

two pre-close estimates (one for whole-loan sales and one for the LLCs); after the sale, 

however, the transactions with seller financing showed stronger improvements. ADC 

assets provided much lower returns (43.7 percent) than either other CRE (54.2 percent) 

or single-family residential assets (54.7 percent). ADC assets also showed the strongest 

improvements compared with the initial projections; this may be because of value added 

through effective servicing or because ADC loan values are more heavily influenced 

by improvements in the real estate market, or both.111 In terms of the number of bids 

received or differences in the basic structure of the risk-sharing agreements, no clear 

trends in recoveries were readily discernible. 

Sales of Other Real Estate (ORE). As with most types of assets in receivership, the number 

of ORE assets (that is, foreclosed properties) increased rapidly at the start of the 2008–2013 

crisis, and by the end of the crisis more than 13,500 ORE assets had been acquired. To 

dispose of its ORE, the FDIC relied primarily on direct sales of the assets by real estate 

brokers. If the assets did not sell within established FDIC timelines, the properties were 

sold at public auction. One advantage of this strategy was that the brokers aggressively 

marketed the property during the listing period, since properties placed in public auctions 

were subject to a reduced commission. In addition, the FDIC found that disclosing that a 

property was to be included in a scheduled auction often caused a hesitant buyer, fearful of 

becoming involved in competitive bidding, to make an offer. 

The FDIC’s ORE auctions were held in a location near the properties being sold. In 

addition, often there were options that allowed bidders to submit bids by phone or online 

as well. The auctions included dozens, and sometimes even hundreds, of properties for 

sale from multiple receiverships. The FDIC sought to include a mix of attractive and 

less-appealing properties in each auction to increase interest and encourage competitive 

bidding. The properties were listed both on the FDIC’s website and on the auctioneer’s 

110 Note that more than 90 percent of the most recent estimate has already been realized. All recovery estimates 

are discounted to the LLC sale date. 

111 The servicing of ADC loans is more complicated than the servicing of other real estate loans. See OCC, “The 

Conptroller’s Handbook,” 2013, for a discussion. For evidence that land prices are more volatile than other 

real estate prices, see Joseph B. Nichols, Stephen D. Oliner, and Michal R. Mulhall, “Swings in Commercial 

and Residential Land Prices,” Journal of Urban Economics 73 (2013): 57–76, and Raphael W. Bostic, Stanley 

D. Longhofer, and Christian L. Redfearn, “Land Leverage: Decomposing Home Price Dynamics,” Real 

Estate Economics 35, no 2 (2007): 183–208. Land makes up a larger share of the collateral value for ADC 

loans than for other types of real estate lending. 
220 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

website before the sale. The FDIC set reserves for the properties at these auctions, 

based on its assessment of marketability and the length of time the property had been 

previously marketed. At least a few absolute auctions112 were included to strengthen 

investor interest; these were typically used for the least desirable properties. 

The types of ORE sold included bank premises, commercial properties, undeveloped 

land, multifamily properties, and single-family residences. The highest recovery rate 

(70.4 percent of book value) was for bank premises. These properties tended to be well 

maintained and located in well-trafficked areas. Other commercial properties had a 

recovery rate of 57.4 percent. The real estate class suffering the lowest total recovery rate 

was unimproved land, at 36.4 percent. This class of real estate, with no immediate use 

and sometimes located in areas that were overbuilt, often had very little value. The largest 

class by number of units of properties auctioned was single-family residential properties, 

constituting nearly 50 percent of the number of properties that were auctioned. The 

recovery rate for these properties was also higher, at 63.4 percent, than the overall 

recovery rate (59.4 percent) for all ORE sales.113 

Loss-Share Administration and Oversight 

One important task of receiverships does not have to do with selling retained assets 

but with following up on a critical decision made during franchise marketing. When 

the FDIC entered into loss-share agreements at resolution, the P&A contracts included 

a section that laid out the acquirers’ and the FDIC’s responsibilities associated with 

the assets that were to receive loss-share coverage. Because the FDIC retained a large 

share of the risk exposure from the portfolio of assets under loss-share agreements and 

because the FDIC’s loss-share coverage might weaken the acquirers’ incentives to work 

aggressively to minimize losses, it was important for the FDIC to protect its interests by 

carefully monitoring the acquirers’ performance under those agreements.114 

The portfolio of assets under loss-share agreements was dominated by real estate loans. 

CRE loans (which included both ADC loans and other types of CRE loans) constituted 

45% of portfolio assets ($98 billion), and single-family mortgages constituted 35% ($74 

billion). Another 3% ($6.5 billion) was ORE. A total of 1.1 million assets were placed in 

the program. On the basis of asset counts, most of the assets were consumer loans: singlefamily mortgages constituted 43% of the assets, and other consumer loans constituted 

26%. Figure 6.6 provides details. 

112 An absolute auction is an auction where the seller does not set a reserve price (minimum required price). 

Buyers are attracted to absolute auctions because they sometimes result in bargain prices. 

113 Source: https://sales.fdic.gov/closedrealestate/. These figures include most, but not necessarily all, sales of 

retained ORE from 2008 to 2013. 

114 For additional information about the loss-share program, see the section above titled “Loss-Share Purchase 

and Assumption.” See also FDIC, “Loss Share Questions and Answers,” https://www.fdic.gov/bank/ 

individual/failed/lossshare. 
CHAPTER 6: Bank Resolutions and Receiverships 221 

Figure 6.6. Loss-Share Asset Portfolio at Resolution, Number and Dollar Amount 

Number of Assets (000s) Asset Balance ($ Billions) 

39 

94 

482 

16 

290 

108 

0 81 

$31.5 

$66.5 

$74.2 

$6.5 

$4.7 

$19.8 

$1.7 $10.7 

ADC Loans Consumer Loans 1-4 Family Loans Securities 

Other CRE Loans Commercial & Industrial Loans ORE at Resolution Others 

Total Number of Assets: 1,109 Total Asset Balance: $215.6 

About 32% of the asset value of CRE loans came from ADC loans that were especially 

problematic.115 At resolution, 35% of the ADC loans were in default, whereas 11% of 

the other CRE loans were in default. About 9% of the single-family mortgages were in 

default at resolution.116 

The primary goals of the review program were to minimize the FDIC’s losses and ensure 

that the acquirer complied with the terms of the loss-share agreement. If an acquirer had 

asset management weaknesses, inaccurate loss reporting, or other compliance problems, 

the FDIC could mitigate its losses by quickly identifying problems, asking the acquirer to 

address them, and following up with the acquirer appropriately. Two key components of the 

monitoring program were regular on-site reviews and the review of standard information 

reported by the acquiring banks. The FDIC undertook on-site reviews for most acquirers 

annually, although acquirers of the largest portfolios were reviewed semiannually. 

The FDIC also required that acquirers with single-family loss-share coverage pursue 

a loan modification program. Under this program, the loan terms for delinquent owneroccupied single-family mortgages were modified (to make the loan affordable to the 

115 Many failed banks had large ADC exposures. For additional discussion, see chapter 4 and U.S. General 

Accountability Office, “Causes and Consequences of Recent Bank Failures,” GAO-13-71, 2013. 

116 Calculations are based on asset balances rather than counts. 
222 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

borrower)117 if the estimated net present value of the modified loan was higher than the 

net present value of foreclosure.118 Acquirers had several options for assisting troubled 

borrowers in managing their mortgages, thereby minimizing FDIC costs: the acquirer 

could adopt the loan modification program described in the agreement, or other 

programs approved by the U.S. Treasury (such as its Home Affordable Modification 

Program [HAMP]), or other programs that met the same purpose.119 As of March 2017, 

acquiring banks had modified 25,736 owner-occupied first-lien single-family mortgages, 

and two-thirds of the loans were still active and under the loss-share program. Almost 

80 percent of the modified loans that were active in the loss-share program were current, 

and another 6.6 percent were 30 to 59 days delinquent. Compared with other loan 

modification programs, these results appear generally favorable. For example, Fitch 

reported cumulative-to-date default rates of 30 percent or more for modified loans.120 

Because loss share imposes administrative costs on both the acquirers and the FDIC, 

it was often beneficial to terminate agreements once the value of the FDIC’s loss-share 

coverage fell below the loss-share agreements’ administrative costs. As of year-end 

2016, the FDIC had terminated 151 single-family agreements and 156 non-single-family 

agreements. In sum, all the agreements at 159 failed banks had terminated.121 In 2017, 

early termination activity continued to be brisk. 

117 Loans were modified so that the monthly mortgage payment fell below a predetermined percentage of the 

borrower’s income. This was achieved by reducing the interest rate, lengthening the term of the loan, and/ 

or deferring principal and interest payments on part of the loan balance. For a sample agreement, see pages 

58-93, and especially pages 92–93, of https://www.fdic.gov/bank/individual/failed/firstfederal-ca-p-and-a. 

pdf. Also, note that the FDIC provided loss-share coverage for modifications of noncurrent loans as well as 

performing loans with high risk of imminent default—that is, where there was a strong chance that the loan 

would default soon because of the loan characteristics. 

118 In estimating the net present value of modifications, acquirers were expected to consider the redefault 

probability (that is, the probability that the loan might default again) after modification. 

119 The FDIC had to approve alternative programs (except the U.S. Treasury programs) to ensure that they met 

the program goals. 

120 Fitch, “Risk Growing in Mortgage Loan Modifications: Historical Modification Data Review,” Feb. 9, 

2017, 5, https://www.loansafe.org/wp-content/uploads/2017/02/Risk-Growing-in-Mortgage-LoanModifications.pdf. These rates were reported nearly six years after modifications, and some of the loan 

modifications under the loss-share program are not this mature. However, Fitch also reported that 75 

percent of redefaults occurred in the first two years after modification (p. 1). 

121 At some banks, loss-share coverage was provided only for single-family assets or only for non-single-family 

assets. 
CHAPTER 6: Bank Resolutions and Receiverships 223 

Lessons Learned for Resolutions and Receiverships 

As the crisis unfolded, the FDIC learned a great deal and kept making adjustments to 

improve its results. Some of the most important lessons learned from that experience are 

discussed here. 

Lesson 1: Readiness Planning Is Essential 

Early in the crisis, as the speed and size of failures exceeded expectations, the FDIC’s 

infrastructure was challenged (despite the FDIC’s efforts to improve infrastructure 

before the crisis), and the Corporation was forced to devote resources to the expansion of 

its capacity on a largely ad hoc basis. In hindsight, it might have been more effective if the 

FDIC, as part of its readiness planning, had built a larger and more agile infrastructure— 

including staff, contracts, and IT systems—during the lull between the end of the 

previous crisis and the start of this new one. 

The FDIC now has the opportunity to explore options for maintaining readiness in a 

low-failure environment with that environment’s concomitant pressures on the FDIC to 

streamline its operations.122 The difficulty is that trade-offs are necessary between two 

of the FDIC’s responsibilities: to be a steward of the DIF and to maintain preparedness 

for a crisis. In other words, budgetary pressures must be balanced against the reality that 

the magnitude and speed of banking crises are unpredictable. In its readiness planning 

since the end of the crisis, the FDIC has increased its baseline staffing for resolution and 

receivership activities and it continues to enhance its systems and processes to bolster 

its receivership capabilities. Developing scalable and up-to-date receivership IT systems 

is an important aspect of readiness planning because deploying the right technology 

contributes to the FDIC’s ability to manage a crisis successfully. 

But since crises can occur quickly, it is also helpful to have a roadmap for increasing 

key resources and infrastructure when needed. Whether through the use of contractors, 

reallocated employees, rehired annuitants, or new employees, the roadmap can make it 

easier for the FDIC to build its capacity quickly. Plans to build capacity should remain 

broad and focus on scalability and flexibility, but they should also include the technical 

and operational details necessary to implement quick capacity-building. 

Finally, although the 2008–2013 crisis began quickly, especially in comparison with 

the 1980–1994 crisis, the FDIC noticed underlying currents of weakness in depository 

institutions well before the failures accelerated. For example, the FDIC’s 2007 Annual 

Report stated that “The year posed major challenges to financial institutions and to the 

economy as a whole. Slumping housing markets and escalating problems, particularly 

related to subprime mortgage lending, were among the chief contributors to increased 

122 Maintaining readiness in this kind of environment may include exploring how other agencies or private 

companies with highly variable resource demands address their resource challenges. For example, the 

Federal Emergency Management Agency has developed readiness capabilities despite the unpredictable 

need for disaster relief. The Department of Defense has addressed its need to quickly expand capacity by 

using reservists. 
224 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

uncertainty in the financial markets.”123 The FDIC also noticed weaknesses through its 

monitoring of the condition of institutions between examinations: the FDIC’s Statistical 

CAMELS Off-Site Rating (SCOR) system began to flag an increasing number of 

potentially troubled depository institutions in early 2007.124 Going forward, it will be 

helpful to examine the possibility of building resolution capacity earlier—that is, when 

standard indicators of industry condition (including, for example, the SCOR system), 

financial and market indicators, or other signals draw attention to substantial weaknesses 

in the banking industry, even if failure projections are uncertain. The risk of possibly 

becoming temporarily overstaffed (if bank failures should not materialize) might be a 

cost that is justified by the highly cyclical and uncertain workload, but research is needed 

to identify which triggers are likely to be most helpful in initiating the build-up of staff. 

Lesson 2: Consider Offering More Resolution and Financing Options to Acquirers 

As noted above, the loss-share transaction was the FDIC’s dominant resolution offering from 

mid-2009 through 2010. In early 2011, the FDIC expanded its regular resolution offerings 

to include whole bank without loss share, and the FDIC subsequently supplemented its 

regular offerings with other options (especially loan pools) more frequently before it began 

to phase out loss share in 2012. The loss-share option was attractive early in the crisis and, 

especially, at the height of the crisis. Loss share leveraged the FDIC’s natural advantage 

over private parties in absorbing large risks during a period when the market’s appetite for 

risk was low. It reduced disruption to bank customers and communities during a period 

when the cost of disruption was high,125 and it minimized staff and cash needs during a 

period when both were in short supply and future needs were uncertain but potentially 

very large. It might, however, have been advantageous for the FDIC to have broadened its 

offerings more quickly as its resources improved and as its programs for selling retained 

assets became more established.126 For example, the FDIC might have offered loan pools 

with and without loss share as well as whole-bank transactions. 

123 FDIC, 2007 Annual Report, 4, https://www.fdic.gov/about/strategic/report/2008annualreport/index_pdf. 

html. 

124 SCOR uses quarterly Consolidated Reports of Condition and Income (Call Report) data to help the 

FDIC identify institutions that have worsening financial conditions between examination cycles. For 

details, see Charles Collier et al., “The SCOR System of Off-Site Monitoring: Its Objectives, Functioning, 

and Performance,” FDIC Banking Review 15, no. 1 (2003): 17–32, https://www.fdic.gov/bank/analytical/ 

banking/2003sep/2_15n3.pdf. 

125 GAO, “Causes and Consequences.” The GAO studied the disruption caused by failures from 2008 to 2011 

and stated that “our results suggest that bank failures in a state were more likely to affect its real estate sector 

than its labor market or overall economy” (p. 146). Thus, the FDIC’s resolution methods appear to have 

resulted in less severe disruption than what had been documented from earlier bank failures. 

126 Economic theory and research point to benefits for the FDIC from offering a wide variety of options so that 

the markets can determine the most cost-effective option. See Edward J. Kane, “Principal-Agent Problems 

in S&L Salvage,” Journal of Finance 45, no. 3 (1990): 755–64; Kormendi et al., Crisis Resolution; and FDIC, 

“FDIC Policies for the RTC.” 
CHAPTER 6: Bank Resolutions and Receiverships 225 

In addition, the FDIC might consider broadening its options for funding resolutions. 

During the crisis, the FDIC avoided borrowing from the U.S. Treasury or the Federal 

Financing Bank (FFB) by imposing prepaid deposit insurance assessments.127 With the 

infusion of cash from the industry, resolution and receivership methods that required 

working cash became relatively more attractive to the FDIC than they had been before 

the prepaid assessment. Another way to improve the cash position of the DIF (and thus 

provide more freedom to adopt resolution methods that require working cash) might 

have been to offer notes to acquirers instead of, or as an alternative to, cash. This option 

raises serious policy questions that would need to be considered, including questions 

about the appropriate note terms, when and how to offer notes to acquirers, the risks 

associated with this option, and what controls should be put into place. 

Lesson 3: Include Use of National Servicers for Large-Scale Crises in Readiness 

Plans 

Before the recent crisis, the FDIC had been able to sell assets quickly at field sites that 

were open for only a few months at each failed-bank location. When the crisis struck 

and markets for such assets suddenly dried up, the FDIC retained more assets, its scope 

of operations suddenly widened, and its previous strategy became less cost-effective. 

Thus the FDIC benefited by shifting to a reliance on national loan servicers. National 

servicers made possible stronger and more consistent loan servicing and supported a 

more comprehensive asset sales strategy—one that often improved prices by grouping 

assets from multiple receiverships into various sales initiatives. However, executing such 

a large shift in operations in the middle of a crisis was not optimal, and the FDIC might 

have avoided some of the associated disruption had there been an opportunity to make 

the change earlier. This experience suggests that readiness plans should include either 

the ongoing maintenance of national servicing contracts—even during periods when the 

FDIC’s receivership activity levels are modest—or an ability to switch to national servicing 

contracts promptly without having to expend scarce resources to set up the program. 

Although the cost of retaining national servicers during periods of low activity may seem 

high, these costs must be balanced against the value of being able to seamlessly scale up 

this key component of receivership operations when activity levels increase, especially with 

little lead time. 

127 For additional discussion, see chapter 5 as well as FDIC, Prepaid Assessments, 74 Fed. Reg. 59056–59066 

(Nov. 17, 2009), https://www.fdic.gov/regulations/laws/federal/2009/09finalad51nov17.pdf. As discussed 

in chapter 5, prepaid assessments had benefits beyond the improved liquidity of the DIF. The DIF cash 

position was also improved by increased assessment rates, a special assessment in 2009, and the FDIC’s 

heavy use of whole-bank resolutions, including loss-share resolutions. 
226 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Lesson 4: Structured Sales Worked Well 

The FDIC used two types of structured transactions to sell retained assets during the 

crisis: LLCs and securitizations. Both of these asset sale methods allowed the FDIC to 

pool similar assets to attract more bidder interest; they were also designed so that the 

FDIC retained a significant share of the financial risks associated with the assets (thus 

potentially improving the FDIC’s recoveries but leaving the FDIC exposed to additional 

losses if markets declined). 

Although recoveries varied across individual LLC transactions, the overall recoveries 

for the LLC program were materially higher than estimated bulk loan sale recoveries and 

original estimates. The strong recoveries were probably influenced by the combination 

of well-aligned incentives and the market and asset management expertise of the 

managing members. Recoveries for securitized loans were also higher than estimated 

recoveries from bulk loan sales. Market improvements probably contributed to the 

higher recoveries for both programs. 

Lesson 5: Effective Loss-Share Administration Requires Adequate Infrastructure 

For three reasons, FDIC oversight of the loss-share agreements was critical to the success 

of the loss-share program. First, the risk exposure that the FDIC retained was in this 

instance substantial. Second, the program had the potential to weaken the incentive 

of acquirers to manage the portfolios in ways that minimized the FDIC’s costs. Third, 

some acquirers were unfamiliar with the program requirements. Four elements proved 

to be most important for administering the oversight process. The FDIC and the 

acquirer needed to move quickly to ensure a mutual understanding of expectations; 

the FDIC had to conduct regular on-site reviews to ensure compliance with the lossshare agreements; the FDIC needed to follow up on any areas of disagreement or 

noncompliance; and the automated data collection and reporting system, together 

with the associated requirements for standardized data reporting, made it possible 

to apply FDIC procedures more consistently, and supported effective program-wide 

management. To mitigate program losses effectively in the future, it is critical that the 

FDIC implement the necessary back-office operations and infrastructure to oversee 

the program promptly and effectively. 

Postscript: Areas for Future Research and Conclusion 

A well-informed staff is invaluable when a crisis erupts. A staff that has a strong 

knowledge of the FDIC’s historical resolution experience and a deep understanding 

of its options and the legal requirements, operational requirements, costs, and policy 

trade-offs for each option improves the FDIC’s ability to make good decisions. During 

the 2008–2013 crisis, however, the FDIC made numerous choices based on incomplete 
CHAPTER 6: Bank Resolutions and Receiverships 227 

information. Although incomplete information is inevitable during periods with heavy 

bank-failure activity, there may be opportunities to reduce the FDIC’s future uncertainties 

by using information from the recent crisis (both from the FDIC and elsewhere) and 

the available academic research to analyze questions likely to arise the next time bank 

failures increase. The next time may be either another crisis or a period of more-moderate 

increases in failure activity. 

Examples of areas in which additional research may prove helpful are the trade-offs in 

resolving failed banks, costs and benefits of prompt asset sales, early-warning tools, the 

use of risk-sharing transactions and the incentives embedded in risk-sharing agreements, 

the market power of asset buyers, and seller financing options. 

Trade-Offs in Resolving Failed Banks. Study the trade-offs among minimizing costs, 

minimizing disruption from failures, minimizing operational and financial risk, 

minimizing liquidity needs, and encouraging market discipline when failed banks are 

sold. How should the FDIC balance these trade-offs as it considers what resolution 

strategies to pursue? Should the balance shift in response to industry conditions and 

general economic conditions, and, if so, how?128 

Costs and Benefits of Prompt Asset Sales. The FDIC’s strategic shift toward swift 

liquidation was implemented consistently through all its asset sale programs and was 

embodied in Annual Performance Goals for prompt marketing of assets and termination 

of receiverships.129 This was a fundamental policy choice with broad effect. It yielded 

notable benefits, such as minimizing asset servicing costs, reducing the FDIC’s need for 

receivership infrastructure, and reducing potential market distortions from excessive 

government holdings of assets. There were also costs. Because assets were sold promptly 

during a serious downturn, high risk premiums (and possibly discounts demanded by 

asset buyers with market power) were embedded in many of the sale prices.130 Receivership 

interest earnings were lower.131 The importance of asset liquidation speed to the resolution 

process and the importance of the associated costs to the FDIC—and to society—call for 

careful analysis of the effects that follow from this fundamental policy choice. 

128 The FDIC’s statutory mandates preclude some potential shifts but allow others. 

129 As noted above, the FDIC sought to market all assets within 90 days and to terminate receiverships 

(without specific impediments) within three years. The FDIC currently has very similar goals in place. 

For details on the FDIC’s current strategic goals, see FDIC, “Strategic Plans,” https://www.fdic.gov/about/ 

strategic/. 

130 The FDIC mitigated the costs by marketing widely and including risk-sharing provisions. 

131 This occurred because the earning assets were sold quickly. Had they remained in receiverships, the 

receiverships would have collected more interest payments. 
228 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

Early-Warning Tools. Investigate the possibility of devising early-warning tools that 

could trigger timely increases in resolution staff yet would be relatively unlikely to yield 

“false positives” that would lead to excessively high staff levels. 

Risk-Sharing. Consider how much risk-sharing is appropriate for the FDIC. How should 

factors such as industry condition influence the FDIC’s use of risk-sharing strategies? 

In addition, explore how the incentives embedded in the various loss-share, LLC, and 

securitization contracts influenced (a) the performance of the underlying assets; (b) the 

servicer’s/asset manager’s behavior; and (c) the FDIC’s losses. What are the implications 

for future resolution and receivership choices (choice of tools, design for the sharing 

percentages, thresholds, true-up, and so forth)? 

Market Power of Asset Buyers. Consider how the small number of interested and 

qualified buyers influences franchise and asset sales, and thus how the market power 

of asset buyers affected the FDIC’s losses. How effective were the FDIC’s strategies for 

counteracting the downward pressure on asset prices because of the market power held 

by asset buyers? What resolution policies, methods, or practices might reduce the extent 

of that market power and therefore reduce the FDIC’s losses? 

Seller Financing Options. Consider additional seller financing options for franchise sales, 

bulk loan sales and ORE sales. The available evidence shows that asset buyers found it 

difficult to obtain financing early in the 2008–2013 crisis and that asset prices drop 

materially when financing options are not readily available.132 The FDIC never offered 

seller financing for bulk loan sales or ORE sales, and rarely offered it for franchise sales.133 

Some analysts have advocated a broader use of seller financing for retained asset sales.134 

132 See Andrei Shleifer and Robert W. Vishny, “Liquidation Values and Debt Capacity: A Market Equilibrium 

Approach,” Journal of Finance 47, no. 6 (1992): 1343–66; Joao Granja, Gregor Matvos, and Amit Seru, 

“Selling Failed Banks,” Journal of Finance 72, no. 4 (2017): 1723–84; Viral Acharya, Sreedhar T. Bharath, 

and Anand Srinivansan, “Does Industry-wide Distress Affect Defaulted Firms? Evidence from Creditor 

Recoveries,” Journal of Financial Economics 85, no. 3 (2007): 787–821; and Viral Acharya, Hyun Song Shin, 

and Tanju Yorulmazer, “Crisis Resolution and Bank Liquidity,” Review of Financial Studies 21, no. 6 (2011): 

2166–205. 

133 Seller financing was offered only for the three franchise sales where it was used. Seller financing is irrelevant 

for many commonly used franchise sale structures because acquirers do not need cash to close the transaction. 

It may be helpful for whole-bank structures where brokered deposits are retained in receivership, for loan 

pools, and for other combination structures. 

134 See Michael Lea and Kenneth Thygerson, “A Model of the Asset Disposition Decision of the RTC,” Journal 

of the American Real Estate and Urban Economics Association 22, no. 1 (1994): 117–33; FDIC, Final Report of 

the FDIC/RTC Transition (1995); and FDIC “FDIC Policies for the RTC.” None of these documents suggests 

universal use of seller financing; instead, they all recommend it in certain circumstances or for certain 

types of assets (such as for commercial ORE or for troubled assets). In contrast, Office of Management and 

Budget, “Resolving the Thrift Crisis,” 1993, discusses trade-offs associated with seller financing but does not 

advocate its use. 
CHAPTER 6: Bank Resolutions and Receiverships 229 

Despite the credit risk associated with seller financing, it may be worthwhile to consider 

whether there might be additional situations where seller financing could yield net benefits, 

and, if so, how to manage risk exposure, set appropriate loan terms and borrower vetting 

processes, and minimize market distortions. 

* * * 

Because every crisis—and every failing bank—is unique, crisis resolution necessarily 

involves making judgments in a difficult environment and with a high degree of 

uncertainty. During the 2008–2013 crisis, the FDIC successfully resolved 489 bank 

failures representing $686 billion in assets. Insured deposit balances were protected 

and receivership assets were liquidated, with the net proceeds used to pay creditors as 

required by law. The FDIC benefited from (a) a robust set of resolution tools provided 

by Congress, (b) its previous experience in applying those tools, and (c) its willingness 

to wield those tools in new ways to respond to new challenges. Moreover, the FDIC 

considered the various trade-offs in light of the constraints it was operating under and 

took decisive actions that proved to be quite successful overall. Particularly important 

examples of such actions were offering loss share early in the crisis and switching to 

national loan servicing contracts. Nonetheless, there are also lessons to be learned from 

the FDIC’s experience in the crisis of 2008 through 2013, as this section has indicated. 

Following up on these lessons will further strengthen the FDIC’s crisis preparedness, 

enhancing its ongoing contribution to maintaining the nation’s financial stability. 
230 CRISIS AND RESPONSE: AN FDIC HISTORY, 2008–2013 

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