Federal Deposit Insurance Corporation 

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and Statistics, 

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FDIC. 

anking 

Review 

Spring/Summer 1992 

Vol. 5, No. 1 

Table of Contents 

Resolution Costs of Bank Failures: An Update of the FDIC Historical 

Loss Model pagel 

by Richard A. Brown andSeth Epstein 

The authors construct a Financial model designed to measure the losses on assets placed into 

receivership by the FDIC. Corporation accounting data are then applied to the model in order to 

evaluate actual loss experience in receiverships between the years 1986 and 1990. In extending 

and updating previous work by Bovenzi and Murton, separate loss measurements are derived for 

six distinct asset types. Additionally, a cost accounting model is used to estimate expenses for each 

of the asset types. From these loss calculations a statistical model is developed to estimate losses 

in future bank failures as a function of the relative proportion of performing and nonperforming 

loans in the institutions' portfolios. 

Bank Failure Resolutions: Implications for Banking Industry Structure, 

Conduct and Performance page 17 

byJohnO'Keefe 

This study examines the impact of failed-bank acquisitions upon acquirers' performance, and 

investigates the determinants of post-acquisition performance. Based upon a sample of recent 

failed-bank acquisitions, the study Finds that the post-acquisition performance of the failed-bank 

acquirers was very similar to that of acquirers of nonfailed banks. Both groups of acquirers were 

able to improve asset quality and maintain proFitability, on average, in the post-acquisition period. 

Neither group of acquirers appeared, however, to realize economies of scale or scope. Finally, while 

the FDIC often grants assurances to failed-bank acquirers, these assurances did not appear to result 

in a significant subsidy to failed-bank acquirers. 

Recent Developments Affecting Depository Institutions page 36 

by Benjamin B, Christopher 

This regular feature of the FDICRanking Review contains information on regulatory agency actions, 

state legislation and regulation, and articles and studies pertinent to banking and deposit insurance 

issues. 
Resolution Coats of Bank Failures 

Resolution Costs 

of Bank Failures 

An Update of the FDIG 

Historical Loss Model 

i i 

by Richard A. Brown and Seth Epstein 

Between the years 1987 and 

1990 there were 800 bank 

failures in the U.S. This 

development has focused considerable 

attention on the size and composition 

af resolution costs. Estimates of 

resolution costs are necessary to 

project future demands on the Bank 

Insurance Fund (BIF) and to evaluate 

particular resolution transactions. This 

study uses newly-available receivership 

data to estimate a model of loss on 

failed-bank assets. 

This study docs not represent the 

first attempt to model resolution 

costs. In the Fall 1988 issue of this 

Review, John Bovenzi and Arthur 

Murton published an article entitled 

"Resolution Costs of Bank Failutes" 

that described a statistical model to 

predict loss on the assets of failed 

banks. It also described how loss esti 

mates are used by the FDIC in apply 

ing the statutory cost test to proposed 

resolution transactions. The BovenziMurton model has proved to be of 

crartsftwtft interest. Economists are 

interested in such a model because it 

provides evidence on the magnitude 

of bankruptcy costs in bank failures 

and identifies factors that influence 

bankruptcy costs. Investment bank 

ers and potential bank acquirers have 

used the model (or proxies for the 

model) to assist them in arriving at 

acceptable bids for failing institu 

tions. FDIC policymakers routinely 

use the model to estimate failingbank losses for the purpose of evaluat 

ing proposed resolution transactions. 

This study extends and updates 

the Bovenzi-Murton model. In addi 

tion to bank failures that have oc 

curred subsequently, there are other 

pressing reasons for an update at this 

time. The three-and-one-half years of 

additional receivership col lections ex 

perience is important given the 

changing composition of problem in 

stitutions from energy and agricul 

tural banks to banks with real-estate 

problems. Additionally, the availability 

of more detailed accounting data on 

the liquidation of failed-bank assets 

permits additional information to be fo 

cused on the problem of predicting loss. 

The remainder of this article ex 

plains the development of the model, 

describes the results, and discusses 

applications. First, the use of loss es 

timates in the cost test is summarized, 

and the measurement of actual loss in 

the aftermath of various transactions 

is discussed. Measurement issues in 

fluence both the definition of the 

sample of failed banks and how loss 

data are used subsequently. Nest, a 

financial model of loss on assets is 

constructed and then used to evaluate 

the FDIC's experience in liquidating 

the assets of banks that failed from 

1986-90. The final section describes a 

new statistical model based on the 

FDIC's liquidation experience that 

can be used to predict loss on assets in 

future bank failures. 

Loss on Assets and the Resolutions 

Process 

Use of Loss Estimates in the 

Statutory Cost Test 

The role of the Bovenzi-Murton 

model in shaping FDIC resolutions 

policy has been narrowly defined. 

First, it generally has been regarded 

as a backup source of information to 

the on-sitc review performed by liqui

•The authors are financial economists in the Di 

vision oFReseaich and Statistics at the FDIC. We are 

grateful for numerous ideas and suggestions from Ar 

thur J. Munon. We also thank the many others in the 

FDIC's Division of Research and Statistics and the 

Division of Accounting and Corporate Services who 

lent us their expertise. 
FDIC Banking Review 

dators. Second, neither the model nor 

the on-site estimate predicts total 

losses in the bank or loss to the FDIC 

insurance fund, but rather, loss on as 

sets. This is the difference between 

the book value of assets at failure and 

the net value that can be recovered in 

liquidation. Third, the asset disposi 

tion scenario underlying both loss 

estimates assumes that the liquida 

tion is conducted by the FDIC. This 

collection method may produce en 

tirely different results than asset dis 

position by an acquirer or servicer who 

is fully or partially at risk of loss. Fi 

nally, the Bovenzi-Murton model is 

prone to relatively large prediction er 

rors in the case of any one bank; how 

ever, these errors are expected to 

generally cancel each other out across 

large numbers of bank failures. The 

type and magnitude of prediction er 

rors limit the ways in which any loss 

estimate can be applied. 

Estimates ofloss on assets are used 

in performing the statutory cost test 

for proposed resolution transactions. 

Prior to the enactment of the Federal 

Deposit Insurance Corporation Im 

provement Act of 1991 (FDICIA), the 

cost test required only that a proposed 

transaction be no more costly to the 

FDIC than a payout and liquidation. 

Under that rule, the FDIC could con 

sider potential transactions in order of 

policy preference, and could select 

any transaction that satisfied the cost 

test. FDICIA requires that the FDIC 

consider all possible transaction types 

and choose the least cosily alternative. 

This does not change the calculation 

of estimated costs for various transac 

tions, but only how they must be com 

pared. 

The cost to the FDIC of a payout 

and liquidation is generally calculated 

by the following formula : 

Cost = (loss on assets equity capital) • 

(insured deposits/total liabilities). (1) 

The first term in Equation 1 de 

fines total expected loss in the bank 

as the loss on assets minus any remain 

ing equity capital. The second term in 

parentheses accounts for the portion 

of losses absorbed by uninsured de 

positors in a payout. By contrast, in a 

purchase-and-assumption (P&A) 

transaction, uninsured depositors are 

covered but a premium is paid by the 

acquiring bank. The cost test requires 

that this premium be at least as large 

as losses that would have been in 

curred by uninsured depositors in a 

payout. More in-depth treatments of 

FDIC resolutions policy and the cost 

test appear in Bovenzi and Murton 

(1988) and Bovenzi and Muldoon 

(1990). The measurement of actual 

loss on assets in the aftermath of a 

resolution transaction is discussed 

below. 

Measuring Actual Loss for 

Various Resolution Trans 

action Types 

Where Do Failed-Bank Assets Go? 

Every resolution transaction divides 

the assets of the failed bank into as 

many as three parts: 

A. Assets assumed by the acquirer. 

These assets may or may not be 

accompanied by one-time finan 

cial assistance or an option to later 

return the asset to the FDIC. 

B. Assets subject to a collecting poo! or 

loss-sharing agreement. These assets 

are managed and collected by the 

acquirer on behalf of the FDIC. 

Collecting-pool managers gener 

ally receive management fees and 

incentive fees, while loss-sharing 

generally exposes the acquirer to 

the risk ofloss. These assets may 

or may not be carried on the books 

of the acquirer, and may or may not 

be funded by the FDIC. 

C. Assets assigned to the receivership. 

These assets are managed and col 

lected by FDIC liquidators on be 

half of the claimants of the 

failed-bank receivership. Liquida 

tors may, in turn, assign certain as 

sets to subcontractors. 

Aside from the treatment of unin 

sured depositors, FDIC resolution 

transactions are largely defined in 

terms of how failed-bank assets are 

handled. In a payout all assets gener 

ally are assigned to the receivership 

for liquidation (Category above). In 

an effort to reduce losses, the FDIC 

has attempted to keep assets under 

private control whenever feasible and 

cost-effective. The FDIC's preferred 

way to keep assets in the private sec 

tor is by use of a total asset purchaseand-assumption (TAPA) transaction, 

whereby essentially all assets are as 

sumed by the acquirer (Category A) in 

exchange for one-time financial assis 

tance. The problem with this transac 

tion is that uncertainty on the part of 

potential acquirers concerning the 

value of troubled assets often leads to 

requests for more financial assistance 

than the cost test can justify. This is 

not a problem if FDIC retains prob 

lem assets in receivership (Category 

C)and passes the "clean" assets to the 

acquirer (Category A), as is the case in 

a standard P&A transaction. While 

this effectively removes asset valua 

tion as an issue, the FDIC has to dis 

pose of the most difficult failed-bank 

assets. 

Since 1988, two new types of P&As 

have been used to keep assets tinder 

private management while control 

ling the risk assumed by acquirers. 

Under a P&A incorporating a collecting 

pool, problem assets are managed by 

the acquirer under contract with the 

FDIC (Category B above). While the 

acquirer is not exposed to losses on 

these assets, the collecting-pool 

agreement provides the acquirer a 

management fee, reimbursement for 

asset-related expenses, and an incen 

tive fee related to the level of recov 

eries. Examples of collecting-pool 

transactions include the acquisition of 

First Republic Bank by NCNB Texas 

in 1988 and the acquisition of the 

Bank of New England by 

Fleet/Norstar in 1991. The second 

type of structured P&A is based on 

loss-sharing between the FDIC and 

the acquirer on a specified pool of 

assets. Under the loss-sharing ar 

rangement incorporated in the 

The cost teai is altered in rhe presence of secured 

and preferred liahiliiies or subordinated debi among 

[he bank's liabilities, or if a depositor preference atai

me inapplicable. SeeBovenzi and Muldoon (1990). 
Resolution Costs of Bank Failures 

Figure 1 

Financial Components of Asset Disposition 

by FDIC Liquidators or Acquirers/Servicers 

of Failed-Bank Assets 

TOTAL OUTLAYS 

1991 acquisition of Southeast Bank by 

First Union Bancorp, the FDIC will 

absorb 85 pe rcent of charge-offs taken 

on qualifying failed-bank assets, with 

the acquirer picking up the remain 

der. Limited reimbursement of assetrelated expenses incurred by First 

Union were also a provision of the 

Southeast transaction. 

Under either of these arrange 

ments, assets not assigned to a collect 

ing pool or loss-sharing arrangement 

(Category B) are either retained by 

the receivership (Category C) or as 

sumed outright by the acquirer (Cat 

egory A). In order to measure the loss 

on assets in any transaction, one must 

crack all of the assets to their ultimate 

destinations, summarized by Catego 

ries A, B, and above. The next prob 

lem is the measurement of recoveries, 

expenses, ana Joss on these assets. 

Measurement of Loss on Assets. Mea 

surement of loss on assets consists of 

defining a standard for collections, 

TOTAL RECOVERIES 

AND LOSS ON ASSETS 

and then measuring net recoveries 

against that standard, as depicted in 

Figure 1. 

The left-hand stack of Figure 1 

represents total outlays by the FDIC 

with regard to failed-bank assets.2 

These are the sum of book value at 

failure {plus post-closing adjust 

ments), and liquidation expenses. 

Total outlays represent the standard 

for 100 percent recovery of asset 

value. The right-hand stack in Figure 

1 represents how well liquidators or 

acquirers did in recovering outlays. 

The sum of gross recoveries plus loss 

on assets is identically equal to total 

outlays. The shaded region between 

the stacks represents net asset recov 

eries, or gross recoveries minus ex 

penses. 

Implications of Data Availability for 

the Design of the Study. The design and 

implications of this study are shaped 

by the availability of data. Although 

the measurement of loss on assets is 

conceptually the same no matter 

where the assets end up, available 

data on recoveries and expenses differ 

according to the mode of asset dispo 

sition. As a rule, detailed information 

on assets assumed or managed by 

acquirers is either not available or has 

only recently begun to be collected by 

the FDIC. For assets assumed out 

right by the acquirer (Category A), 

segregated data on failed-bank asset 

recoveries and expenses are genera! ly 

unavailable. What is available is the 

gross transfer price of assumed assets. 

For standard P6cA transactions, the 

assets pass at book value, implying 

100 percent recovery of the asset. For 

transactions in which assets pass to 

the acquirer at a price lower than book 

value, the gross transfer price of as 

sumed assets is known also. However, 

the specific markdowns for individual 

assets or types of assets are generally 

not available.3 For assets assigned to 

collecting pools or loss-sharing ar 

rangements {Category B), data on re 

coveries and expenses are being 

collected currently. However, avail 

able data on past asset recoveries in 

collecting pools are generally in 

compatible with the receivership data 

this study utilizes. 

Assets recovered by the receiver 

ship itself generate a detailed ac 

counting record that facilitates 

measurement of net recoveries and 

loss on assets for several asset types. 

The Financial Information System 

(FIS) database of the FDIC tracks 

asset balances and cash flows for up to 

thirteen asset types.4 For the purposes 

of this study, asset portfolios are cat 

egorized into six asset types: in 

stallment loans, commercial and 

The term "outlays" is noi :o be confused »uh 

ILcash outlays" which denotes the amount of cash 

assistance provided in a resolution transaction. Rather, 

the term is used here to describe the amount of cash 

and non-cash resources committed in taking over 

failed-bank assets and making recoveries. 

For example, bids received for TAPA transac 

tions reflect total financial assistance required for the 

assumption of the asset portfolio. 

The thirteen asset rypes are1 installment loans. 

commercial loans, student loans, failcd-bank securi 

ties, mortgages, owned real estate, owned assets, 

mortgages in possession, charge-offs, other assets, 

judgments, serviced loans, and international loans. 
FDIC Banking Rcvieu 

Table 1 

Sample of Failed Banks, 1986-1990 

Including Payout, Insured-Deposit Transfer (IDTR), and 

Purchase-and-As sumption (P&A) Transactions 

Located in the four stares adjoining Texas. 

industrial loans, securities, mortgages, 

Dwned real estate, and other assets.5 

By using the detailed accounting 

data on receivership recoveries and 

expenses, a history of asset disposition 

by FDIC liquidators can be produced 

to capture the actual loss on assets for 

transactions in which all problem as 

sets are disposed of by FDIC. These 

transactions include payouts, insureddeposit transfers, and standard P&A 

transactions. However, the available 

data are not sufficient to give the same 

treatment to transactions in which 

some or all of the problem assets were 

disposed of by the private sector. This 

means that TAPA transactions and 

P&As that involved a collecting pool 

or loss-sharing arrangement are omit 

ted from the sample. Not only does 

this remove some of the largest recent 

bank failures, but it prevents analysis 

of how the private sector performs in 

disposing of assets. Data currently 

being assembled will facilitate future 

study of large-bank failures and pri 

vate-sector disposition of failed-bank 

assets. 

Sample. The sample consists of 619 

banks that failed from 1986 through 

1990. Specific samples analyzed in 

the following sections are derived 

from this group. Table 1 summarizes 

the financial characteristics of the 

The six asset types were arrived at to fold some 

of the minor categories (such as international loans] 

into other categories that were larger and more relevant 

to analysis. 

overall sample. Sample banks range in 

asset size from $1.57 million to $2,151 

million, averaging total assets of $56 

million. National banks represent 41 

percent of the total sample. Ten mu 

tual savings banks are among the 

state-chartered institutions. Fortyone percent of sample failed banks 

were located in Texas, while another 

17 percent were located in adjoining 

Southwestern region states. Sample 

banks generally failed due to sectorspecific credit problems with agricul 

tural loans, energy loans, or real-estate 

loans. 

Dealing with the Time Distribution of 

Collections. An important component 

of failed-bank asset disposition is the 

timing of recoveries. The FDIC seeks 

to market failed-bank assets im 

mediately upon their assignment to 

the receivership; for many of the more 

marketable assets this is accom 

plished quickly. However, for lessmarketable assets, time is needed to 

collect information, secure title to col 

lateral if necessary, and to arrange the 

terms of sale. At the same time, peri 

odic principal, interest, and operating 

income are received for notes, perform 

ing loans, and owned assets until the 

assets mature or are sold. 

The time distribution of asset re 

coveries by asset type for failed-bank 

receiverships begun from 1986 

through 1990 is characterized in Fig 

ures 2 through 7. The horizontal bars 

in each figure indicate the percentage 

of total recoveries that occur in years 

one through five of the receivership, 

along with any projected future col 

lections as of December 1991. Each 

horizontal bar indicates the aggregate 

time distribution of receivership re 

coveries for banks that failed during a 

single calendar year. 

As might be expected, most recov 

eries on securities are made in year 

one of the receivership (Figure 2); this 

is also the case for installment loans 

(Figure 3), and to a lesser extent for 

the category "other assets" (Figure 7). 

Recoveries tend to proceed less 

quickly for commercial loans (Figure 

4), mortgage loans (Figure 5) and, par 

ticularly, owned real estate (Figure 6). 

While banks closed during the early 

years of the sample have already real 

ized most of their total projected re 

coveries (see the upper bars in each 

Figure), more recent receiverships 

(lower bars) have considerable unreal 

ized collections. This raises the issue 

of how theas-yet-uncollected portion 

is estimated, and how reliable that 

estimation process is. 

FDIC liquidators generate initial 

estimates ofgross cash recoveries (GCR) 

for each asset when it is assigned to a 

receivership, and periodically update 

their estimates until the asset is fully 

recovered or written off. GCR con 

sists of appraisals in the case of owned 

assets, cash-flow analysis for perform 

ing assets, and formulaic valuation of 

certain small-dollar-volume assets. 
; Resulutiun Costs <if Bank Failures 

Receivership Asset Recoveries, Actual and Projected 

Percent by Year 

Figure 2 Figure 3 

Securities Installment Loans 

1991 

0 10 20 30 

\ 1 I 

40 50 60 

Percent 

I 

70 

I 

BO 

I 

90 

! 

100 

I 

10 

I 

20 

I 

30 

I I I 

40 50 60 

Percent 

I 

70 

I 

80 

1 

90 

I 

100 

Figure 4 

Commercial Loans 

Figure 5 

Mortgage Loans 

19B6 

I I I I I I I I I ~~l I I I I I I I1I 

0 10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 

Percent Percent 

Figure 6 Figure 7 

Real Estate Owned Other Assets 

1991 

0 

I 

10 

I 

20 

I 

30 

I I I 

40 50 60 

Percent 

I 

70 

I 

80 

I 

90 

I 

100 

~i 

10 

i 

20 

i 

30 

i r~~i 

40 50 60 

Percent 

1 

70 

1 

80 

1 

90 

1 

100 

Cash Recoveries In Year 1 Cash Recoveries in Year 2 Cash Recoveries In Year 3 

Projected Future Recoveries Cash Recoveries In Year 4 Cash Recoveries In Year 5 aa (H12/91 
FDIC Banking Review 

Because the measure of total pro 

jected recoveries for recent failed 

banks is highly dependent on GCR 

valuations in this study, an indirect 

test was conducted of the accuracy of 

GCR estimates made at the outset of 

the receivership. This test involves a 

comparison of the FDIC's initial esti 

mate of loss to the Corporation (just 

after the failure of the bank) with an 

updated estimate as of December 31, 

1990. For banks that failed between 

1986 and 1988, the current estimate is 

based almost entirely on actual collec 

tions, while the initial estimate was 

based largely on GCR estimates. 

Table 2 contains the results of this 

comparison. The sample includes all 

banks that failed between 1986 and 

1990. Average initial loss estimates 

and average current loss estimates are 

presented by year of failure and by 

transaction type. The comparison in 

dicates a tendency for loss estimates 

to rise on the order of three to five 

percent of total assets for failures that 

occurred between 1986 and 1988. 

Loss estimates for more recent fail 

ures show less of a tendency to 

change, due to their relatively brief 

collections experience. The overall 

tendency of loss figures to rise over 

Table 2 

Average FDIC Reserve for Loss as a Percent of 

Failed-Bank Assets, by Transaction Type Just After Failure, 

and as of December 1990 for Banks Failing 1986-90 

time is concentrated in the most diffi

cult-to-collect receivership assets. 

This conclusion rests on the fact that 

any assets assumed by acquirers or 

sold at the outset of the receivership 

cannot be responsible for subsequent 

changes in FDIC loss estimates.6 

The relative uncertainty in asset 

valuations for recently failed banks 

leads one to use loss estimates cau 

tiously for those banks. However, be 

cause recent failures are also the most 

relevant cases to look to when predict 

ing future bank-failure costs, a trade 

off in quality versus relevance is 

implied. This study incorporates the 

recovery experience of bank failures 

through the end of 1990. Projected 

future recoveries as of the end of 1990 

are measured as the GCR for that 

asset type as of the end of 1990. This 

represents the best available informa 

tion concerning the value of receiver 

ship assets as of the time this study 

was undertaken. 

The broad time distribution of re 

coveries also raises the issue of carry

ingcosts for receivership assets during 

the recovery process. This study ad 

dresses this issue by incorporating an 

eight percent annual discount rate to 

all quarterly recoveries and expenses 

over the life of the receivership.' 

Henceforth, all figures tepresenting 

recoveries and expenses over the life 

of the receivership will incorporate 

this discount factor. 

Liquidation Expenses 

Expenses include direct expenses 

and indirect expenses (Equation 7). 

Direct expenses are incurred in the 

maintenance, management, and sale 

of specific assets. Examples of direct 

expenses include taxes, asset-related 

legal fees, brokerage fees, and asset 

management fees. In practice, they 

Besides ihc value of assets, another uncertain 

factor in determining FDIC's loss is the amount and 

structure or" receivership claims. However, because 

[he PDIC predominates as a claimant to failed-bank 

receiverships, the effect of changes in non-FDLC 

claims is minimal. 

While the choice of a discount rate is always 

controversial in this type of application (see, for exam 

ple. Stiglitz (1982)). it is clear that the rare chosen is 

SLPA indicates Small Loan P&A in which small-balance loss assets are purchased by the acquirer. preferable to assuming a discount rate of zero. 
Resolution Costs of Bank Failures 

are almost entirely charged to owned 

real estate assets. Indirect expenses 

represent general liquidation ex 

penses that cannot be charged to spe 

cific assets. This accounts for 

overhead associated with FDIC liqui 

dation activities, including liquidator 

salaries, office expenses, and travel 

expenses. Although indirect expenses 

are not charged to specific receiver 

ship assets, a statistical procedure has 

been used to allocate them to assettype categories. The results are incor 

porated in the model results that 

follow; further detail on expense def 

initions and allocation procedures ap 

pears in Appendix 1. 

Summary of Results: FDIC 

Liquidation of Failed-Bank 

Assets, 1986-90 

Net Recoveries on Receivership Assets. 

The recovery experience of FDIC re 

ceiverships from 1986 through 1990 is 

summarized in Table 3. This analysis 

is based on the book value of assets 

assigned to receiverships from 1986 

through mid-1988, plus those as 

signed to more recent receiverships 

that have been terminated. Net re 

coveries for this sample ranged from 

an average of almost 38 cents on the 

dollar for owned real estate to almost 

88 cents on the dollar for securities. 

Much of the difference in net recov 

eries among asset types is due to 

differences in liquidation ex 

penses. Direct expenses were al 

most exclusively confined to owned 

real estate assets, averaging al 

most nine percent of the receivership 

book value for that category. The sta 

tistical allocation of indirect ex 

penses places them most heavily on 

the categories of installment loans 

(11.4 percent), owned real estate (8.3 

percent), commercial loans (5.7 per 

cent), and other assets (5.6 percent). 

The average level of gross recoveries 

across all asset types was 56.7 cents 

on the dollar, compared to 50.1 

cents on the dollar after liquidation 

expenses. 

The results in Table 3 indicate that 

for assets that end up in receivership, 

Financial Model ofAsset Liquidation 

Accounting Identities 

Seven accounting identities make up the financial model of asset liquidation. 

They appear in Equations 2 through 8 below: 

Total Assets = Assets Assumed + Assets Retained by FDIC. (2) 

Total Outlays = Assets Retained + Advances + Adjustments 

+ Liquidation Expenses. (3) 

Gross Recoveries = Realized Recoveries +- Estimated Future 

Recoveries. (4) 

Net Recoveries = Gross Recoveries Liquidation Expenses. (5) 

Loss = Total Outlays Gross Recoveries. 

= Assets Retained + Advances + Adjustments 

Net Recoveries. (6) 

Expenses = Direct Expenses + Indirect Expenses. (7) 

LOA = (Loss/Total Assets) '100. (8) 

where: 

Total Assets Total failed-bank assets at closing. 

Assets Assumed = Assets assumed by acquiring bank in a P&A, net of putbacks. 

Assets Retained = Assets liquidated in receivership, including pucbacks. 

Advances = Advances made to enhance/preserve asset value. 

Adjustments = Post-closing adjustments to closing-asset balances. 

Direct Expenses i Expenses incurred for specific assets. 

Indirect Expenses = All other liquidation expenses. 

Realized Recoveries = Principal, interest, late fees, offsets. 

Future Recoveries = December 1990 estimated value of assets remaining in 

receivership. 

Loss Dollar value of loss in receivership. 

LOA - Loss as a percent of failed-bank assets. 

book values tend to significantly ovet- sumption is that the taking of assets at 

state the value that can be recovered book value by acquirers represents 

in liquidation. This difference is com zero-loss disposition of assets from the 

posed of two factors. The first is the standpoint of the FDIC. The second 

difference between the true market assumption is that liquidation ex 

value of the assets and the value re penses for assets assumed by 

corded on the books of the failed acquirets were zero. The final as 

bank, which is based on historical sumption is that estimated indirect 

cost. The second factor is any dissipa liquidation expenses for the 1986-88 

tion of value that takes place from the sample (see Table 3) can be applied 

forced liquidation of assets for which to all receiverships from 1986 

there are no well-developed markets. through June 1990. The expense 

Although losses in receivership can ratios in the Tables that follow ex 

not be separated empirically into press average expenses in receiver 

these two components using the avail ship as a percent of the total 

able evidence, the sheer magnitude of assets of the failed bank. 

losses suggests that neither compo More recent receiverships (mid

nent—acting alone—is likely to ac 1988 through mid-1990) are included 

count for all of them. in the histotical loss analysis due to 

Historical Loss on Failed-Bank As the need for an up-to-date sample. 

sets. Three assumptions are necessary These more recent cases tend to rely 

for the translation of net recoveries in more on appraised value as a proxy for 

receivership into a measure of loss on future collections, and therefore, as 

total failed-bank assets. The first as suggested by Table 2, may have a 
FDIC Banking Review 

Table 3 

Net Recoveries as Percent of Receivership Assets by Asset Type 

for AU FDIC Failed-Bank Receiverships Begun 1986-1988 

and Terminated Receiverships Begun 1986-1990 

(as Percent of Inception Assets, by Type) 

Table 4 

Weighted Average Loss on Assets 

for FDIC-Insured Failed Banks, 1986-1990 by Year of Failure 

(Loss as Percent of Failed-Bank Assets, by Type) 

tendency to slightly understate losses. 

However, they are included because 

they may be more representative of 

the losses the FDIC will face in up 

coming failed-bank cases. Tables 4 

through 6 summarize the historical 

loss results. 

Loss on total assets by year (Table 

4) appears to fall from 45 percent in 

1986 to about 22 percent for 1990. 

However, the large figure for 1986 is 

principally the result of one large fail 

ure with high losses; the low figure for 

1990 may reflect the as-yet-incom 

plete writedown of assets in relatively 

new receiverships. The best figure for 

comparison to the sample of Bovcnzi 

and Murton is the average loss on as 

sets for banks that failed from 1987 

through 1989, which is 27.8 percent.* 

This is somewhat lower than the 32.8 

percent average for Bovenzi and 

Mutton's sample of 1985 and 1986 

failures. 

Losses measured in the years after 

1986 were mostly lower than losses in 

1986 across the six asset types. This 

is particularly the case for mortgage 

loans (58 percent loss in 1986 versus 

19.1 percent in 1987-89), owned real 

estate (86.8 percent versus 67.8 per 

cent), and securities (25 percent ver 

sus 2.6 percent). Losses for 1987-89 

were slightly higher than losses in 

1986 for installment loans and other 

assets. 

Overall, the highest losses were 

measured for owned real estate 

(ORE). Losses measured 63.6 percent 

of the original book value of ORE for 

the entire sample period, and mea 

sured 67.8 percent for the 1987-89 

sample period; average loss for indi 

vidual years reached a high of 86.8 

percent for 1986. However, losses 

measured for ORE suffer from a bias 

related to the process of foreclosure 

on real-estate loans. When a loan is 

foreclosed, our financial model treats 

the written-down value of collateral as 

a recovery to the loan category and as 

an outlay, or addition to book value, 

for ORE. If the full value of the col 

lateral is not subsequently recovered, 

a corresponding loss then accrues to 

ORE—when it actually belongs to the 

original loan category. This tends to 

bias upward the measure of losses as a 

percent of original book value for 

ORE, and correspondingly to bias 

downward the measure for the loan 

category (primarily mortgage loans). 

Among the loan categories, com 

mercial loans averaged the highest 

losses (40.8 percent for the 1987-89 

sample period), while installment 

loans (31.3 petceru) and mortgage 

loans (19.1 percent) were also the 

source of substantial losses. Failedbank securities (2.6 percent for 1987

S F1S rcuoliii ire not available fur l'!R5. making a 

duect comparison to ihe eruire Bovenzi-Munon sjiti

ple impossible. 
Rcsokuion Costs of Bank Failures 

89) imposed the smallest losses of any 

category. Losses on other assets, 

which include all assets not accounted 

for in the other five categories, aver 

aged 33.2 percent for the 1987-89 pe 

riod. 

For the period 1986-90, total loss 

on assets differed according to the 

type of resolution transaction {Table 

5). Payouts averaged the highest loss 

on total assets (46.1 percent) and the 

highest for all individual asset types 

except mortgages and securities. Insured-deposit transfers averaged 32.4 

percent loss on total assets, while 

P&As averaged only 26.8 percent. 

This difference may be the result of a 

difference in asset quality between 

these groups of institutions or, alter 

natively, the result of some acquirers 

assuming assets at book value that 

turned out to impose losses on them. 

Analysis of LOA by asset size 

(Table 6) shows that losses do not 

differ systematically across size 

classes. The largest size class—over 

$500 million in assets—showed 

above-average losses in mortgages 

and securities largely due to the influ 

ence of one institution. Beyond this 

effect, losses on securities still tended 

to grow with asset size. Otherwise, 

losses remained relatively constant 

across size groups. 

Interpretation ofResults. The ability 

to disaggregate the LOA ratio—from 

a single ratio to total assets to six indi 

vidual ratios for six asset categories— 

provides a clear indication of how 

portfolio composition influences loss 

on assets for failed banks. Based on 

the results above, it appears that a 

failing bank whose balance sheet is 

heavily concentrated in commercial 

loans and ORE is likely to experience 

greater losses as a percent of total as 

sets than a bank that primarily carries 

mortgage loans, installment loans, and 

securities. However, despite the 

marked differences in average loss ra 

tios by category, still more informa 

tion is needed in order to use these 

data for predictive purposes. For ex 

ample, the mortgages category in 

cludes all loans secured by real estate, 

from one-to-four family mortgages to 

commercial office construction loans. 

The marked difference in the risk 

profiles of these two loan types sug 

gests the need for a more detailed 

estimation process to explain loss for 

the mortgage category. Similarly, the 

tendency for measured losses on ORE 

to be biased upward suggests the 

need for a procedure to correct the 

problem before such a loss coefficient 

is applied to real-estate assets on the 

books of failing banks. The statistical 

model developed in the following sec 

tion addresses these, and other, isStatistical Model to Predict Loss 

The previous sections described 

the methods by which historical losses 

are measured. This section uses the 

measure of historical loss on assets to 

estimate a statistical model that can 

be used to predict loss on assets for 

future bank failures. The model 

consists of equations that estimate 

loss for each of the six asset categories 

depicted in Tables 3 through 6. Total 

predicted loss on assets can then be 

found by summing the loss estimates 

for the six asset types. 

Structure of the Model 

The model is designed to address 

three shortcomings of the average 

LOA ratios presented above. The first 

is the tendency of the measured loss 

ratios to overstate losses on ORE and 

understate losses on mortgage loans. 

This is addressed by jointly estimat 

ing the loss equations for these two 

asset types. The single estimated 

equation for loss on mortgages and 

ORE allocates loss to ORE according 

to statistical variation in the sample, 

rather than the accounting procedure 

that originally created the bias. 

The second shortcoming of the 

simple averages is that they do not 

account for the quality of the loan 

portfolios nor their risk characteris 

tics. Quality of the loan portfolios is 

incorporated in the model by estimat 

ing loss as a function of performing 

loans and nonperforming loans at the 

time of failure. The risk characterise 

Table 5 

Weighted Average Loss on Assets 

for FDIC-Insured Failed Banks, 1986-1990 

by Type of Resolution Transaction 

(Loss as Percent of Failed-Bank Assets, by Type) 
FDIC Banking Review 

Table 6 

Weighted Average Loss on Assets 

for FDIC-Insured Failed Banks, 1986-1990 

by Total Failed-Bank Assets 

(Loss as Percent of Failed-Bank Assets, by Type) 

tics of the mortgage portfolio are ac 

counted for by estimating mortgage 

losses also as a function of "risk realestate loans," defined as the sum of 

land and development loans and com 

mercial real-estate loans. These realestate loans are hypothesized to pose 

a higher risk of loss in liquidation than 

the permanent residential loans that 

make up most of the remainder of the 

mortgages category. 

This approach to loan quality and 

risk differs from that chosen by 

Bovenzi and Murton (1988) and 

James (1991), both of which esti 

mated total loss on assets as a function 

of examination classifications. De 

spite the potential benefits of incor 

porating examiner evaluations in the 

loss equations, examination data were 

not available disaggregated into the 

appropriate asset types. The use of 

explanatory variables reflecting per 

forming and nonperforming loans and 

high-risk mortgage loans provides al 

ternative measures of loan quality and 

risk that are consistent with the disag 

gregated model. 

"Other assets" made up 11 percent, on average, 

Fine rota] assert of banks [hat failed between 1986 

and 1990. 

The expense model is described in Appendix 1. 

The remaining specification issue 

is how to account for the recognition 

of loss by the bank prior to failure. 

Because charge-offs prior to failure 

reduce losses realized in liquidation— 

and because this recognition is highly 

discretionary—charge-offs are added 

back during the final year of operation 

to the loss equations for installment 

loans, commercial loans, mortgage 

loans, and other assets. This removes 

final-year loss recognition as a factor 

in determining loss on failed-bank as 

sets. Final-year charge-offs are rein

troduced to the loan equations by 

adding them to the left-hand-side 

variable (loss) and one right-hand

side variable (nonperforming loans). 

This assumes that all charge-offs are 

taken on nonperforming assets. 

For securities and other assets, his 

torical weighted averages serve as loss 

equations in the model. This ap 

proach was chosen due to the particu 

lar characteristics of these two asset 

types. Securities, consisting of a mix 

of mainly government-backed mort 

gage and Treasury instruments, are 

subject to interest-rate risk rather 

than credit risk. This has two im 

plications for the estimation of a pre 

dictive model. First, the interest-rate 

environment during which sample se 

curities were first issued, and finally 

disposed of, is not likely to be in effect 

for banks to which the model might 

be applied in the future. Second, be 

cause securities enjoy an efficient af

termarket, estimating the gain or loss 

on the securities of a failing bank in an 

on-site analysis will probably be inex 

pensive and highly accurate. How 

ever, for completeness the weighted 

average loss on securities is incorpo 

rated into the model. 

The term "other assets" covers a 

mixture of assets remaining after the 

major loan categories are considered: 

these include non-real-estate-owned 

assets and fixed assets, international 

loans, and lease financing receivables. 

This diverse collection of assets does 

not lend itself to an estimation process 

such as that applied to the loan cate 

gories. Consequently, the loss coeffi 

cient in Equation 14 shown in the 

next section represents a simple his 

torical average and does not result 

from a regression procedure.9 How 

ever, because charge-offs on lease fi 

nancing receivables have the same 

potential effect on loss for this cate 

gory as loan charge-offs do for the loan 

equations, the weighted average loss 

on other assets is taken on the value 

of loss plus final-year charge-offs on 

lease financing receivables. 

Liquidation expenses are intro 

duced to the model by including an 

expense coefficient that is applied to 

the book value of failed-bank assets 

for each category. These coeffi 

cients are based on the expense 

equation estimated for receivership 

net recoveries. Expense coeffi 

cients that were estimated as a per 

cent of receivership assets are 

transformed into coefficients applica 

ble to failed-bank assets for use in the 

predictive model. This is done by de 

flating them to account for failedbank assets assumed by acquirers in 

the sample. By doing so, we make 

two assumptions about liquidation 

expenses. First, expenses on assumed 

10 
Resolution Costs of Bank Failures 

assets will be zero. Second, the level of assumed assets in resolution transactions 

for new failing-bank cases (to which the model is applied) will follow historical 

averages. 

Results of Model 

Regression results and summary statistics for the five estimated equations 

appear in Appendix 2. Based on these results, and the expense ratios from 

Appendix 1, loss for the six asset types can be predicted using the following six 

equations. Note that the final term in each equation is the beliefs regarding the 

bias associated amount of liquidation expenses for that category. 

LOSS ON: 

INSTALL .27 • (P) + .43-<NP+CO)- CO + .072'(INSTALL). (9) 

COMM .36-(P) + .48-<NP+CO>-CO + .049-(COMM>. (10) 

MORT .094 (P) + .19 • (NP+CO) CO + .27 • (RISK) 

+ .021* (MORT). (11) 

ORE .41-(ORE)+ .162'(ORE). (12) 

SEC .046-(SEC)+ 0.0-(SEC). (13) 

OTHER .37 • (OTHER + CO) CO + .032 • (OTHER). (14) 

where: 

INSTALL, COMM, MORT, ORE, SEC, and OTHER are the book values of 

the six asset categories at failure, P is performing loans for that category, NP is 

nonperforming loans for that category, CO is charge-offs for that category, and 

RISK is risk real-estate loans (land and development plus commercial real-estate 

loans). 

Interpretation ofResults 

Evaluating the Estimated Coefficients. The model results indicate that significant 

losses are experienced on the performing loans of failed banks, and that yet higher 

losses are associated with nonperforming loans at the time of failure. These 

nonperforming loan coefficients account for the negative effect of charge-offs 

prior to failure on losses experienced in liquidation. As for the loss coefficients on 

performing loans, the highest are registered on commercial loans (36 percent of 

performing loans), and the lowest are found for performing, non-risk real-estate 

loans (9.4 percent). These results reflect, on the one hand, the problems associated 

with disrupting commercial credit relationships, and, on the other hand,the 

relative success with which performing residential mortgages can be liquidated. 

The "risk real-estate" coefficient of 27 percent in the mortgage equation (11) 

reflects the additional losses experienced on land and development loans and 

commercial real-estate loans in excess of losses attributable to the performing and 

nonperforming coefficients. Joint estimation of losses on mortgage loans and ORE 

results in a loss coefficient for ORE after expenses (57.2 percent) that is lower 

than the sample weighted averages indicated in Table 4. This conforms to prior 

beliefs regarding the bias associated with real-estate loan foreclosures during the 

receivership. 

The final two asset-type equations—representing historical weighted averages— 

indicate that the FDIC may expect credit losses of 4.6 percent for the securities 

portfolio (no charge-offs are included for this category), and 37 percent of loss plus 

charge-offs for other assets. 

Applying the Model to New Failing Banks. Use of the model is straightforward. By 

way of example, suppose the book value of installment loans is $1000, of which 

$700 are performing, and that charge-offs over the past four quarters total $100. 

Pre-expense loss is 27 percent of the value of performing loans (.27* $700 -$189) 

plus 43 percent of the sum of nonperforming loans and charge-offs (.43 • $400 = 

$172 minus charge-offs (.43 • $400 = 

$172) minus charge-offs ($100). Pre

expense loss is therefore $189 + $172 

$100 = $261. Total loss for this cate 

gory, including expenses, is found by 

adding an additional 7.2 cents per dol 

lar of book value for expenses (.072 

• $1000 = $72). Total loss for install 

ment loans would therefore be $261 + 

$72 = $333. 

After predicted loss is found for all 

six categories in this fashion, sum 

ming across the six categories yields 

total predicted loss on assets.11 This 

figure can be used in the statutory cost 

test to evaluate the cost of various 

proposed resolution transactions. 

Summary and Conclusions 

This study describes the measure 

ment of loss on failed-bank assets and 

applies a financial model of loss on 

assets to a sample of banks that failed 

between 1986 and 1990. The results 

apply strictly to a scenario in which 

the problem assets of the bank are 

assigned to an FDIC-managed re 

ceivership for collection. Losses on 

assets assigned to receivership are 

found to average 50 percent overall, 

and to differ widely among the six 

asset-type categories. These results 

were translated back to the balance 

sheets of the banks prior to failure to 

arrive at average loss on failed-bank 

assets. Loss averaged 27.8 percent of 

total failed-bank assets for the most 

relevant sample period, ranging from 

2.6 percent for securities to 68 percent 

for owned real estate. Loss figures for 

sample banks were used to estimate a 

predictive model of loss on assets 

which is based on separate equations 

for each of the six asset types. 

The predictive model updates the 

model of Bovenzi and Murton (1988) 

which the FDIC has used to derive 

loss estimates for failing banks. This 

updated version has several advan 

tages over the original model that are 

mainly attributable to improved data. 

The model also includes certain zero loss and 

roia! loss assets found in ihe Call Reports, For a mure 

complete description of the use of the model see Ap 

pendix 3. 
Resolution Costs of Bank Failures 

The first is a more up-to-date histori tion data are now available for individ problems in New England and the 

cal record of failed banks and receiv ual asset types. The updated model Middle Atlantic states appear on the 

ership collections. The second accounts for the portfolio composition FDIC's "Problem Bank List," theabil

advantage is the ability to separate of failing banks in a way that previous icy to incorporate portfolio composition 

liquidation expenses into direct and statistical loss models could not. As in the model will be a decided advan

indirect expenses. Finally, liquida more banks experiencing real-estate tage. 
Resolution Costs of Bunk FjMi 

APPENDIX 1 

The Treatment ofLiquidation Expenses 

All expense figures were derived using a sample of receiverships begun from 1986 through mid-1988, plus those begun 

from mid-1988 through the end of 1990 that have been terminated. This sample is intended to be representative of liquidation 

expenses across the entire life of a receivership, and therefore omits recent failures that have not been fully collected. 

Direct Expenses 

Most direct expenses were charged to specific asset types by liquidators. We used the average distribution of these charges 

to allocate the remaining direct expenses among the asset types. The average distribution across the sample was: installment 

loans 0.4 percent of direct expenses; commercial loans 7.2 percent; mortgage loans 6.3 percent; ORE 63.6 percent; securities 

0.0 percent; and other assets 22.4 percent. 

Indirect Expenses 

Only a portion of indirect expenses were originally charged to specific receiverships. The remainder of indirect expenses 

during each quarter (including the salaries of Washington employees and other overhead) was distributed according to the 

distribution of total receivership assets for that quarterly period. 

Few indirect expense items were charged to specific asset types by liquidators. decision was made to allocate all indirect 

expenses to specific asset types by use of a statistical cost accounting model. The model is specified: 

INDIRECT = BO + Bl • INSTALL + B2 • COMM + B3 -MORT + B4 • ORE + B5 • SEC + B6 • OTHER + e, 

where the dependent variable is total indirect expenses over the life of each receivership and the dependent variables are 

the book value at failure for each of the six asset types. Estimation was made with all variables scaled by total assets at failure 

and with B5SEC omitted to prevent perfect collinearity on the right-hand side. The results appear in Table 1A. 

Table 1A 

Regression Results for Statistical Cost Equation 

t statistic 

11.4 

17.2 

3.3 

5.0 

NA 

5.2 

These coefficients appear as expense ratios in Table 3, Net Collections by Asset Type. 

Application of Expense Ratios to Failed-Bank Assets 

These direct and indirect expense ratios—estimated for receivership assets— probably overstate the liquidation expenses 

that would be incurred on assets that do not come to the receivership. Because the FDIC considers assets assumed by the 

acquirer to be liquidated at zero loss, a liquidation expense ratio of zero is appropriate for assumed assets. However, prior tc 

failure there is no way to tell which assets, if any, will come to the receivership or be assumed by the acquirer. 

In order to make the estimated expense ratios applicable to total failed-bank assets, they were reduced to reflect the amount 

of assets assumed by acquirers in sample cases. Table 2A shows how the estimated expense ratios for receiverships are 

transformed for application to failed-bank portfolios. 

13 

Resolution Costs of Bank Failures 

APPENDIX 3 

Application of the Model 

Application of the model requires data to be input from the last Call Report prior to failure, and from the preceding three 

Call Reports. All assets from the Call Report will ultimately be placed in either one of the asset types described in the paper, 

or in the Zero Loss or Total Loss categories described below.. 

Model Asset Type Call Report Items 

INSTALL Loans to Individuals 

Credit-Card Loans 

COMM Commercial Industrial Loans plus 

Farm Loans Not for Agricultural 

Production 

MORT Loans Secured by Real Estate 

ORE Owned Real Estate plus Fixed Assets 

SECURITIES Securities 

For INSTALL, COMM, and MORT the value of nonperforming assets is provided in the Call Report, with the value of 

performing found by subtracting this amount from total book value. Charge-off data are also provided and must be located 

in the four Call Reports prior to failure; loss for INSTALL and COMM may be estimated by application of the model 

coefficients to these values. 

For MORT the additional information regarding the risk real estate is necessary. The Call Report items necessary are: 

Loans for RE Construction and Land Development; and 

Loans Secured by Nonfarm, Nonresidential Properties. 

Loss for MORT should include the model coefficient for RISK applied to this value. 

For ORE and SECURITIES, neither nonperforming nor charge-off data are necessary, and loss may be estimated by 

application of the model coefficients to the appropriate book value. 

Zero Loss Assets 

Certain assets are assumed to have zero loss in liquidation; the Call items associated with these are: 

Cash and Fed Funds Sold; and 

Loans to Other Financial Institutions. 

Total Loss Assets 

Certain assets are assumed to have 100 percent loss in liquidation; the Call items associated with these are: 

Income Earned but not Collected; 

Goodwill; 

Other Intangible Assets; and 

Deferred Taxes. 

Other Assets 

This asset type includes Call items that do not fit clearly into one of the above categories. These items are entered here. 

In addition, the Call Report contains both nonperforming and charge-off data for "Lease Financing Receivables." This should 

be entered, and the model coefficient applied to the total will yield predicted loss. 

Expenses 

Expense ratios are always applied to the book value of the relevant asset type. No expenses exist for Zero Loss and Total 

Loss Assets, or for Securities. 

is 
FD1C Banking Review 

REFERENCES 

Bovenzi, John F. and Maureen E. Muldoon, "Failure-Resolution Methods and Policy Considerations," 

FDIC Banking Review (Fall 1990): 1-11. 

, and Arthur J. Murton, "Resolution Costs of Bank Failures." FDIC Banking Review 

(Fall 1988): 1-13. 

James, Christopher, "The Losses Realized in Bank Failures," Journal of Finance (September 1991): 1223-42. 

Stiglitz, Joseph E. "The Rate of Discount for Benefit-Cost Analysis and the Theory of the Second 

Best," in Discounting for Time and Risk in Energy Policy, edited by F.R. Ruskin, Johns Hopkins 

University Press, 1982. 

16 
■ 

Bank Failure Resolutions 

Bank Failure Resolutions 

Implications for Banking Industry Structure, 

Conduct and Performance 

byJohnO'KeefeH 

This study reviews the 

performance of acquirers of 

failed banks and ascertains 

the determinants of post-acquisition 

performance. Acquisitions may 

substantially increase acquirers' scale 

and scope of operations. Therefore, 

the study's first objective is to 

determine the extent of operating 

cost savings acquirers may have 

achieved through economies of scale 

and scope. In addition, acquirers of 

failed banks often receive assurances 

from the FDIC, which may result in 

failed-bank acquirers having distinct 

advantages over acquirers of 

nonfailed banks. Therefore, a second 

objective is to determine whether 

these assurances resulted in 

significant subsidies to failed-bank 

acquirers. Finally, acquisitions may 

increase acquirers' share of local 

banking markets, as well as increase 

overall market concentration. 

Therefore, a third objective is to learn 

whether resolution of bank failures 

has led to undue concentration of 

market power. 

The dramatic increase in bank and 

thrift failures in recent years has had a 

significant effect upon the structure 

of the U.S. banking industry. Be 

tween 1984 and 1990,1,204 FDIC-in

sured commercial and mutual savings 

banks failed or received FDIC openbank assistance.' These institutions 

comprise over 86 percent of all failed 

banks since 1970 and represent 9.4 

percent of the number of commercial 

and mutual savings banks in existence 

at year-end 1990. 

Upon the failure of an insured 

bank, the FDIC is appointed receiver, 

and is responsible for both compen 

sating creditors and disposing of the 

failed bank's assets. In an effort to 

reduce the costs associated with fail 

ure resolutions, Congress has given 

the FDIC the authority to use a wide 

variety of methods to dispose of 

failed-bank assets and compensate 

bank creditors. Historically, failure 

resolutions have involved the sale of 

some portion of the failed bank's de 

posits and/or assets to a healthy for 

mer competitor.2 

Given the FDIC's growing role in 

the redistribution of failed banks' real 

and financial resources, it is important 

to understand the impact failed-bank 

acquisitions have had upon acquirers' 

performance. Moreover, equally im 

portant questions arise concerning the 

determinants of post-acquisition per 

formance. Therefore, this study fo 

cuses on two specific and related 

questions: Did failed-bank acquirers 

benefit from the acquisition and, if so, 

what were the sources of these bene 

fits? If it can be shown that failedbank acquirers benefited through real 

efficiency gains, then resources may 

well have been put to a "better" use. 

If, however, acquirers' performance 

was impaired by the acquisition, or 

acquirers benefited at the expense of 

their competitors, then resources 

were not put to a "better" use. 

The next section analyses the postacquisition performance of failedbank acquirers and attempts to 

determine the extent of cost savings 

that acquirers may have achieved as a 

result of the increases in scale and 

scope of operations resulting from ac 

quisitions. Lastly, the determinants of 

post-acquisition performance are in 

vestigated, including whether in 

creases in market share, as well as 

John O'Kcefe is a financial economist in the 

FDIC's Division of Research and Statistics. The au

rhor thanks Kevin Brown, George French, and Jay 

Goiter of the FDIC's Division of Research and Statis 

tics for useful comments and information. 

Individual member banks of failed mulnbank hold 

ing companies were counted as separate bank failures. 

A thorough discussion of The policy considerations 

and choice criteria used by the FDIC in selecting the 

method of failure resolution is contained in "FailureKcsolurion Methods and Policy Considerations" by 

John Bovenzj and Maureen Muldoon, FDIC Banking 

ft*TM, Fall 1990, pp.1-11. 

17 
FOIC Banking Review 

FDIC assistance, play a role in deter 

mining acquirers' performance. 

The Performance of 

Failed-Bank Acquirers 

Bank performance is typically as 

sessed by peer group comparisons of 

financial performance indices on cap 

ital adequacy, asset quality, earnings 

and liquidity. In assessing the perfor 

mance of failed-bank acquirers there 

are at least two useful comparisons to 

be made. First, comparisons of the 

pre- and post-acquisition perfor 

mance of failed-bank acquirers allow 

one to see the direct effect acquisi 

tions have on performance. In addi 

tion, it is useful to know if the 

experience of failed-bank acquirers is 

typical of banks involved in mergers 

and acquisitions. 

Sample Selection 

The 1,204 bank failure and assis 

tance transactions occurring between 

1984 and 1990 resulted in 1,024 (85.1 

percent) FDIC-assisted mergers, con 

solidations, and absorptions, hereafter 

denoted as assisted acquisitions. 

These transactions involve several 

forms of governmental assistance. 

First, the FDIC solicits bids on failed 

banks' assets and/or deposit liabili 

ties. Second, the FDIC negotiates 

with bidders and ultimately selects 

the winning bidder (acquirer). Fi 

nally, acquirers of failed-bank assets 

often receive additional assurances 

from the FDIC, through the ability to 

return to the FDIC any acquired as 

sets which become nonperforming 

over some period of time after the 

acquisition. For these reasons, 

acquirers of a failed bank's deposit 

franchise and/or asset franchise are re 

ferred to as "assisted acquirers."" 

Assisted acquisitions involved the 

formation of de riovo banks, as well as 

the assumption of failed-bank depos 

its and/or assets by existing banks. In 

the majority of FDIC failure resolu 

tions, the failed bank's assets and/or 

deposits were acquired by another 

local bank. Table 1 shows that 99.9 

percent of assisted acquirers were lo 

cated in the same state as the failed 

bank and 55.2 percent were located in 

the same county as the failed bank. 

In some cases, the same acquirer 

was associated with several failed 

banks. This can occur when an 

acquirer of a failed multibank holding 

company consolidates operations or 

acquires several failed banks over 

time. Further, acquirers of failed 

banks often have been involved in 

acquisitions of nonfailed banks with 

out governmental assistance (unasTable 1 

Proximity of Acquirers to 

Acquired Failed Banks 

1984-1990 

sisted acquisitions). When a bank has 

made several assisted and/or unas 

sisted acquisitions over time, it is dif 

ficult to assess the impact of 

individual acquisitions upon the 

acquirer's performance. Therefore, 

acquisitions occurring on differing 

dates within thtce years of one an 

other were excluded from the sample. 

In a few rare instances, multiple ac 

quisitions can take place on the same 

date, as occurs when an acquirer con 

solidates operations. Because such 

consolidations can be treated as one 

event, they were included in the sam 

ple. This restriction yields three-year 

periods, both before and after each 

acquisition, during which no other 

bank acquisition event takes place. 

The resulting group of assisted acqui 

sitions taking place on or after March 

31, 1984, consisted of 489 assisted 

acquirers. 

De novo banks, unlike established 

banks, will not have a pre-acquisition 

performance history against which to 

judge post-acquisition performance. 

Therefore, de novo banks were ex 

cluded from the sample. Moreover, 

because the performance of de novo 

banks typically differs from that of 

established banks, those acquirers 

that had been in existence for less 

than nine years prior to the acquisition 

were excluded from the sample. Fur 

ther, to ensure that a reasonably 

lengthy performance record existed, 

an additional requirement was that 

acquirers report financial data for at 

least two years before and after the 

acquisition. Finally, in order to obtain 

consistent financial reports, the sam 

ple only included commercial banks. 

The resulting sample of assisted 

acquirers consisted of 123 banks. 

A firm's performance typically is 

judged relative to that of its peers, or 

banks of similar size, location, and 

asset composition. Mergers and ac 

quisitions can result in substantial 

changes in bank size and portfolio 

composition, making it difficult to use 

these attributes in historical perfor 

mance evaluations. Because this 

study is concerned primarily with as 

sessing the impact of assisted acquisi 

tions upon bank performance, 

comparisons are made with a peer 

group of banks involved in nonfailed

bank acquisitions, i.e., acquisitions 

made without governmental assis 

tance. Such comparisons will reveal 

Accord ingl y, assisted acquirers arc banks involved 

in FDlC-assislcd mergers, consolidations, and absorp

lions, occuring ai the [ime of a bank's failure. Subse 

quent to [he failure resolution, ihe FD3C mim 

liquidate any remaining failed-bank assets not as 

sumed by assisted acquirers. Purchasers of remaining 

failed-bank assets put into liquidation are not treated 

as assisted acquirers. 

Such consolidations are infrequent in the samples 

used here. Two such cases, involving the acquisitions 

rjf two failed banks by one acquirer on the same dale 

were included in the final sample of 123 failed-bank 

acquirers. Among unassisted acquirers, there were AA 

such cases {out of 346 events) which were included in 

[he final sample. For clarity, such acquirers are 

counted once in the sample. 

This ensures that banks included in the sample 

have been operating for at least seven years before 

their financial data are used in this study. This sevenyear maturity period was chosen (somewhat arbitrarily; 

because newly established banks have less stable fi 

nancial ratios [hen established banks. Fo[an example 

of a "study using similar maturity criteria sec "Compar 

ison of Failed arid Healthy Banks' Capital Ratios" by 

James Marino. FDICErorroinirOittlonk, Vol. Z, No. I I, 

November 1984. Marino uses a three-year maturity 

criterion. 

18 
Bank Failure Resolutions 

whether assisted acquirers' perfor 

mance histories are typical of banks 

involved in acquisitions. Applying the 

same criteria to the selection of unas 

sisted acquirers resulted in a compar 

ison sample of 346 banks. 

The requirement that acquirers, 

both assisted and unassisted, be in 

volved in only one acquisition during 

a six-year period may be viewed by 

some as leading to a biased sample. 

Specifically, it may be that these 

acquirers were not involved in other 

acquisitions over a six-year period be 

cause the initial acquisition did not 

proceed smoothly. If this bias were 

present, then one may not find the 

cost savings and efficiency gains that 

may come with successful acquisi 

tions. It is difficult to know why the 

sample of acquirers were not involved 

in other acquisitions over the period 

studied. 

The number of acquisitions a bank 

makes will be determined by the 

number of available acquisition tar 

gets, the acquirer's financial condi 

tion, as well as the growth objectives 

of acquirers. review of the intervals 

between acquisitions for all banks, 

between March 1984 and December 

1990, indicated that approximately 35 

percent of the acquisitions took place 

within six years of one another. Nearly 

65 percent of the acquisitions were 

made by banks involved in only one 

acquisition between 1984 and 1990. 

While it remains unclear why the sam 

ple of acquirers made only one acqui 

sition during a six-year period, the 

sample is not biased in the sense that 

the acquisition frequency of acquirers 

in the sample is typical of the majority 

of acquirers. 

Sample Characteristics 

The data suggest that many banks 

in the samples may have had the abil 

ity to reduce operating costs in the 

post-merger period by closing redun 

dant branch offices, as well as to 

achieve other economies due to over 

laps in markets. For the samples in 

this study, a majority of the acquisi 

tions were made by banks operating 

in the same geographic markets as the performance, the acquired assets 

acquired bank. Approximately 56per must represent a significant increase 

cent of the assisted acquirers operated in the acquirer's size. As shown in 

in the same county as the assumed Tables 2 and 3, for the majority of the 

bank, while 27 percent operated in cases included in the samples, the ac 

the same city. Among the sample of quisitions increased bank size sub 

unassisted acquirers, 59 percent oper stantially. 

ated in the same county as the as The composition of acquired as sumed bank, and 24 percent operated sets will affect also post-acquisition in the same city. performance. Assisted acquirers have 

The relative size of the acquired distinct advantages over unassisted 

bank is another important consider acquirers with regard to acquired as 

ation. If a failed-bank acquisition is to sets. In assisted acquisitions, 

significantly impact the acquirer's acquirers typically do not take on a 

Table 2 

Percentage Change in Acquirer Assets 

Due to the 123 Assisted Acquisitions1 

The percentage change in an acquirer's assets associated with a bank acquisition was computed 

as the change in the acquirer's assets during the quarter in which the acquisition took place. Data 

on bank assets were obtained from the Reports of Condition and Income (Call Reports! banks are 

required to file with their Federal bank regulator each quarter. {Call Reports show bank finances as 

of the end of each calendar quarter.) It is expected that some of the change in bank assets, as 

measured here, is unrelated to the acquisition. However, most of the large increases in assets found 

here are associated with the acquisitions. 

Table 3 

Percentage Change in Acquirer Assets 

Due to the 346 Unassisted Acquisitions 
FD1C Banking Review 

Table 4 

Composition of Acquired Assets in Bank Acquisitions 

As a Percent of Assets Acquired 

majority of the assets of the failed riod of less than one year after acqui 

bank. Any assets not assumed by the sition. 

acquirers are liquidated by the FDIC. Available data on the composition 

If the liabilities assumed by assisted of assets assumed in assisted acquisi 

acquirers exceed acquired assets, the tions are presented in Table 4. For all 

difference is made up with cash or assisted acquisitions occurring be 

notes from the FDIC. Finally, tween 1986 and 1990, approximately 

acquirers of failed banks also may 42 percent of failed banks' assets were 

have additional assurances in the form acquired by assisted acquirers. For 

of governmental guarantees, such as the sample of 123 assisted acquirers, 

the right to return some acquired as approximately 46 percent of failed 

sets to the FDIC if the assets become banks' assets were acquired by as 

nonperforming. These "putback" sisted acquirers; about 47 percent of 

provisions are usually limited to a pe the assumed assets were loans, while 

Table 5 

Location of Acquirers1 

Number of Banks Assets Following Acquisition 

Acquirer Group Acquirer Group ($ Billions) 

Region Assisted Unassisted Assisted Unassisted 

Central 5 109 

Midwest 37 83 

Northeast 1 30 

Southeast 5 55 

Southwest 57 43 

West 18 26 

The geographic regions were defined along state lines as follows: 

Northeast Conneeiicui, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, 

New Jersey, New York, Pennsylvania, Puerto Rico, Rhode Island, and Vermont. 

Southeast Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina. Tennessee, Virginia, and 

West Virginia. 

Central Illinois, Indiana, Kentucky, Michigan, Ohio, and Wisconsin. 

Midwest- Iowa. Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. 

Souihwest Arkansas, Louisiana, New Mexico, Oklahoma, and Texas. 

West Alaska, Arizona, California, Colardao, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington, 

and Wyoming. 

Islands Pacific and Atlantic Islands not included in other regions. (No banks in rhe samples fcU wiihin the 

Islands region.) 

securities comprised 37 percent of ac 

quired assets, on average.6 

Information on the assets acquired 

in unassisted acquisitions was not 

readily available. However, approxi 

mations can be made using reported 

financial data. Specifically, changes in 

unassisted acquirers' asset composi 

tion were measured for the quarters 

ending immediately before and after 

acquisitions using data from bank Re 

ports of Condition and Income filed 

with federal bank regulators. Al 

though some changes in portfolio 

composition may be unrelated to the 

acquisitions, given the relatively short 

time span involved and the relatively 

large magnitudes of the acquisitions, 

most of the asset fluctuations should 

be related to the acquisitions. As 

shown in Table 4, the 346 unassisted 

acquirers acquired more loans and 

fewer liquid assets than did assisted 

acquirers. Approximately 66 percent 

of the estimated acquired assets of 

unassisted acquirers were loans, while 

11 percent were securities. 

Bank performance also is influ 

enced by national and regional busi 

ness cycles, as well as by local and 

national bank regulations, e.g., state 

branching restrictions. Further, stud 

ies have shown that performance dif 

fers significantly across bank 

asset-size groups, primarily because 

asset size is a proxy for differences in 

bank operations, funding, and loan 

portfolio composition. One can ex 

pect that these same factors will influ 

ence the performance of bank 

acquirers. In light of these considera 

tions, Tables 5 through 7 further char 

acterize the samples. 

Table 7 indicates that both the as 

sisted and unassisted acquirer sam 

ples were comprised mostly of 

relatively small banks. Approximately 

92 percent of the sample of assisted 

The author is indebted to Richard Brown and Seth 

Epstein of the FDIChs Division of Research and Sta 

tistics for supplying data on the composition of assets 

assumed by assisted acquirers Data on the assets of 

failed banks (which are either assumed by assisted 

acquirers or liquidated by the FDIC} arc contained in 

the FDTC's Financial Information System maintained 

by eIic Division of Ai;L-|,un[ing<ind Corporate Services. 

1 

20 
■ 

Bank Failure Resolutions 

Table 6 

Timing of Acquisitions 

Table 7 

Post-Acquisition Asset Size of Acquirers 

Asset Size 

Over $10 Billion 

$3 Billion to $10 Billion 

$1 Billion to $3 Billion 

$500 Million to $1 Billion 

$300 Million to $500 Million 

$100 Million to $300 Million 

$50 Million to $100 Million 

$25 Million to $50 Million 

$10 Million to $25 Million 

Under$10Million 

acquirers had post-acquisition assets 

under $300 million. Among assisted 

acquirers, 76 percent had post-acqui 

sition assets under $300 million. In 

addition, both samples of acquirers 

included acquisitions dispersed over 

the 1986 to 1988 period, with the larg 

est number of acquisitions taking 

place in 1987. The two groups of 

acquirers differ substantially, how 

ever, geographic composition. Due 

to restrictions on interstate branch 

banking, acquirers are normally lo 

cated in the same state as the bank 

acquired (see Table 1). Because of the 

high concentration of recent bank fail 

ures in the Southwest, and Texas in 

particular, the highest proportion of 

assisted acquirers are located in the 

Southwest. The sample of unassisted 

acquirers, however, is more varied 

geographically. These differences in 

the regional composition of the two 

groups of acquirers make direct com 

parisons of post-acquisition perfor 

mance difficult. A regression 

approach is used later to control for 

the influence these factors have upon 

bank performance. Despite these lim 

itations to direct comparisons of per 

formance between both groups of 

acquirers, it is still instructive to com 

pare performance trends. 

Asset Growth 

Assisted and unassisted acquisi 

tions can increase bank size substan 

tially very quickly. This was indeed 

the case for the acquisitions studied 

here (see Tables 2 and 3). Figure 1 

shows that the median quarterly asset 

growth rate among the 123 assisted 

acquirers was over 30 percent during 

the quarter of acquisition. For the 346 

unassisted acquirers, the acquisitions 

increased the median quarterly asset 

growth rate to nearly 31 percent. It 

should be pointed out that Figures 1 

and 2, as well as all the succeeding 

Figures, present median values of the 

groups' financial ratios to avoid possi 

ble distortion of the averages by very 

high or low ratio values in the sam 

ples.7 

In order to know whether acquirers 

were oriented toward rapid growth by 

internal means as well, the median 

quarterly asset growth rates for a fouryear period surrounding the acquisi 

tions were reviewed. Figures 1 and 2 

indicate that neither group of 

acquirers appeared to be growth-ori 

ented. Moreover, asset growth rates 

among both groups declined, on aver 

age, following acquisitions. 

Capitalization 

The large increase in bank assets 

associated with these acquisitions 

may result in some acquirers increas 

ing equity capital, either to ensure 

compliance with regulatory capita] re 

quirements or to meet the banks' in 

ternal policies. Among both assisted 

and unassisted acquirers, new capital 

would come from the acquirers. In 

assisted acquisitions, acquirers typi 

cally receive some portion of the 

failed bank's performing assets, along 

with any assumed liabilities. If as 

sumed liabilities exceed acquired as 

sets, the FDIC will inject cash and 

FDIC notes sufficient to cover the 

shortfall. Assisted acquirers are ex 

pected to adequately capitalize the 

combined organization. It is possible 

that the acquiring bank may choose to 

rely heavily upon its existing capital 

base in making the acquisition, 

thereby lowering post-acquisition 

capital-to-assets ratios. 

comparison of mediansand arithmetic averages uf 

he financial ratios gave very sJmiJarresdi[$foj"aJJ finan 

cial irends presented in this study. 

21 
FDIC Banking Review 

Figure 1 

Median Quarterly Asset Growth Rates 

The 123 Assisted Acquirers 

As a Percent of Assets 

35 

30 

25 

20 

15 

10 

-5 

-8-7-6-5-4-3-2-101234 

Number of Quarters from Acquisition 

Figures 3 and 4 indicate that while 

unassisted acquirers tended to main 

tain capital-to-assets ratios after ac 

quisitions, assisted acquirers reduced 

capitalization. This reduction may be 

due to three factors. First, acquirers' 

post-acquisition capital levels are re 

lated to the final capital levels of ac 

quired banks and relevant accounting 

treatment in acquisitions. In purchase 

acquisitions, the acquiring bank may 

not include the existing retained earn 

ings of the acquired bank in the com 

bined institution's retained earnings. 

However, factors such as the creation 

of goodwill (the excess of the pur 

chase price of acquired assets over 

their market value) can add to the 

combined institution's capital. In a 

pooling of interests, the acquirer is 

permitted to add the assumed bank's 

accumulated retained earnings to its 

capital. In failed-bank acquisitions, 

however, the acquired institution is 

insolvent, so that these accounting is 

sues are unimportant.8 Second, the 

Open-bank assistance resolutions ace one excep 

tion io this statement. In open-bank assistance transac 

tions the assisted bank is not declared insolvent aE the 

time assistance is granted and technically has not 

failed. The sample of 123 assisted acquisitions in 

cluded four open-bank assistance transactions. 

9 Nonperforming assets are defined here to include 

all loans and leases past due 90 clays or mote, plus all 

nonaccrual loans and leases. 

nine percent median pre-acquisition 

capital ratios of assisted acquirers 

were relatively high compared to the 

median of 7.6 percent among unas 

sisted acquirers. This may mean that 

assisted acquirers wished to move 

post-acquisition capitalization in line 

with other banks. Indeed, the capitalto-assets ratios of assisted acquirers 

were similar to those of unassisted 

acquirers two years after the acquisi 

tions. Third, assisted acquirers have 

distinct advantages over unassisted 

acquirers in terms of selection of as 

sumed assets, which enabled assisted 

acquirers to assume higher propor 

tions of low-risk, liquid assets (see 

Table 4). Indeed, asset-quality 

trends, presented next, indicated 

asset quality for assisted acquirers im 

proved following acquisitions. As a re 

sult, assisted acquirers may not have 

needed to maintain the same capital 

ization rates in the post-acquisition 

period. 

Asset Quality 

Asset quality improved following 

acquisitions for both assisted and un 

assisted acquirers. Among unassisted 

acquirers, median nonperforming as 

sets, as a percent of bank assets, de 

clined 17 percent two years after 

acquisition. Assisted acquirers experi 

enced a 19 percent reduction.9 As 

stated previously, among assisted 

acquirers the improved asset quality 

is due, in part, to the ability to put 

back acquired nonperforming assets 

to the FDIC. 

As with nonperforming assets, net 

loan charge-offs should be scaled by 

bank assets to control for changes in 

Figure 2 

Median Quarterly Asset Growth Rates 

The 346 Unassisted Acquirers 

As a Percent of Assets 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-8-7-6-5-4-3-2-10 1 2 3 4 6 

Number of Quarters from Acquisition 

22 
Bank Failure Resolutions 

bank size following acquisitions. Be 

cause annualized income and ex 

pense values are more intuitively 

appealing, Figures 5 and 6 present the 

annualized values of quarterly net 

loan charge-offs and provisions for 

loan losses, as a percent of bank assets. 

This same procedure was used to 

measure all income and expenses in 

subsequent Figures. 

Profitability 

Noninterest Expense. One fre 

quently-cited motive for acquisitions, 

both within and outside of banking, is 

improved operating efficiency. In 

bank acquisitions, the acquirer may 

be able to reduce noninterest expense 

by eliminating overlap in branch of 

fices, personnel, and information and 

computer systems. Additional bene 

fits may come from synergies in com 

bining operations. These efficiency 

gains may not, however, appear im 

mediately after acquisition. Reduc 

tions in staff may require severance 

pay, early retirement costs, and pay 

ment of accrued personnel benefits. 

Elimination of redundancies in oper 

ations, such as overlapping branch of 

fices, may be delayed due to leases. 

After a reasonable period, however, 

noninterest expense should decline, 

Figure 3 

Median Capital Ratios 

The 123 Assisted Acquirers As a Percent ot Assets 

10 

O —r-m ^— 

-8-7-6-5 -4-3-2-101234 

Number of Quarters from Acquisition 

as a proportion of bank earnings, if 

redundancies are removed and syner 

gies are realized. 

Figures 7 and 8 show that for both 

groups of acquirers studied, there was 

no evidence of efficiency gains in the 

two-year period following acquisi 

tions. Acquirers' expenses on salaries 

and benefits, as well as on premises, 

remained relatively unchanged. HowFigure 4 

Median Capital Ratios 

The 346 Unassisted Acquirers As a Percent of Assets 

10 

9 

-8-7-6-5-4-3-2-1 0 1 2 3 A 

Number of Quarters from Acquisition 

ever, the financial report category "all 

other noninterest expense" rose 

somewhat following acquisitions. 

There are two components of other 

noninterest expense that may in 

crease as a result of mergers: losses 

resulting from the sale of assets, in 

cluding fixed assets, and amortization 

expenses on goodwill. It is possible 

that losses were incurred from the sale 

of redundant fixed assets following 

acquisitions. Further, in the purchase 

method of acquisition, additional 

goodwill (equal to the amount by 

which the purchase price exceeds the 

market value of the acquired bank) 

may be created, leading to higher 

amortization expenses. 

There are several problems with 

the measurement of acquirers' in 

come and expenses during the im 

mediate post-acquisition period that 

need to be discussed. Specifical ly, the 

fluctuations in all income and ex 

pense ratios seen during the quarter in 

which acquisition takes place (quarter 

0) are due to a combination of ac 

counting issues, and acquisition ex 

penses. From an accounting 

perspective, there are two general 

types of mergers: pooling of interests 

and outrighr purchases. In outright 

purchases, the acquired bank's assets 

5 
FDIC Banking Review 

Figure 5 

Trends in Asset Quality 

The 123 Assisted Acquirers 

Nonperforming Assets 

Provisions for Loan Losses 

-8-7-6-5 -4-3-2-1 0 1 2 3 4 

Number of Quarters from Acquisition 

are marked to market values and 

added to the assuming bank's balance 

sheet. However, in the purchase 

method of accounting, none of the 

acquired bank's year-to-date earnings 

or expenses are carried over to the 

acquirer's income.statements. As a 

result, under the purchase method of 

accounting, during the remainder of 

the year after acquisition, the acquir 

ing bank's year-to-date income and 

expenses, as a percent of bank assets, 

will be biased downward. One means 

of eliminating this bias (used here) is 

to compute quarterly income and ex 

penses, and then annualize the data. 

Computation of quarterly income and 

expense, however, can eliminate only 

the downward bias created in income 

and expense ratios for the quarters 

subsequent to acquisition, not for the 

quarter in which acquisition takes 

place. 

10 Specific criteria must be met by acquirers who 

wish to use the pooling of interests accounting treat 

ment of mergers. For a brief description of these cri 

teria sec Commercial Bank Financial Management in tlic 

Financial'Services/nato/j, Third Edition, by Joseph F. 

Sinkcy. Jr., (Macmillan Publishing Company, 19S9). 

" The direction of the bias for financial statistics 

which deduct expenses from revenues, eg., net in 

come, cannot be anticipated easily and wii] depend 

upon the relative size of the biases created in expenses 

and revenues. 

In a pooling of interests, the ac 

quired firm's year-to-date earnings 

and expenses are carried over to the 

assuming bank's income statements. 

Therefore, the downward bias does 

not appear. Unfortunately, the down 

ward bias is replaced by an upward 

bias because the acquired bank's en 

tire year-to-date income and expenses 

are carried over to the assuming 

bank's income statements for the 

quarter in which the acquisition takes 

place. As a result, computations of 

acquirers' quarterly income and ex 

penses are distorted (biased upward) 

for the quarter in which acquisition 

occurs.11 Fortunately, both these ac 

counting biases are eliminated for 

quarters following acquisition (quar 

ters 1 through 8 in the Figures) by the 

use of quarterly nee income and ex 

pense ratios. 

Finally, there are extraordinary fi 

nancial expenses that occur shortly 

after acquisitions that may temporar 

ily increase noninterest expenses, 

specifically, expenses associated with 

cutbacks in personnel and operating 

capacity. While the acquirer may 

incur unusually high noninterest ex 

penses soon after acquisitions, due to 

these cutback expenses, such ex 

penses should not continue. 

In sum, one may attribute trends in 

income and expenses in quarters one 

through eight to real economic and 

financial events, while fluctuations 

during the quarter of acquisition 

should be ignored. 

Net Interest Income. Another fre 

quently-cited motive for bank merg 

ers is improvement of market shares 

Figure 6 

Trends in Asset Quality 

The 346 Unassisted Acquirers 

As a Percent of Assets 

2.0 

1.8 

1:6 

1.4 

1.2 

1.0 Nonperforming Assets 

0.8 

0.6 

Provisions for Loan Losses 0.4 

__ :_ 

0.2 

Net Loan Charge-offs 0 

-8-7-6-5-4-3-2-1 0 1 2 3 4 

Number of Quarters from Acquisition 
Bank Failure Resolutions 

and enhancement of the acquirer's 

franchise value. Increased access to 

core deposit funding, as well as im 

proved lending opportunities, should 

improve the acquirer's net interest in 

come. Core deposits, i.e., small con 

sumer and commercial deposit 

accounts, are a stable and low-cost 

source of funds. significant increase 

in core deposit levels should lower 

interest expenses. For the sample of 

acquirers studied here, however, 

there was little evidence of increased 

core deposit funding following acqui 

sitions. Among the 123 assisted 

acquirers, median core deposit bal 

ances rose from 86 percent of liabili 

ties, two years prior to acquisition, to 

87 percent of liabilities two years after 

acquisition. Median core deposit lev 

els among the 346 unassisted 

acquirers remained at approximately 

87 percent of liabilities.'2 This lack of 

improvement may explain why inter 

est expense did not fall after acquisi 

tions (see Figures 9 and 10). 

Moreover, there was no evidence of 

improved interest income following 

acquisitions. 

Return on Assets. The combined in 

fluences of changes in operating effi 

ciency, asset quality, and market 

As a Percent of Assets 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

Figure 7 

Median Noninterest Expenses 

The 123 Assisted Acquirers 

Total Noninterest Expense 

Salaries and Benefits 

L Other Noninterest Expense 

0.5 

Expense on Premises 

-8-7-6-5 -4-3-2-101234 

Number of Quarters from Acquisition 

share will be reflected in bank profits. 

Figures 11 and 12 combine informa 

tion on these three factors and show 

the trend in bank profits, as measured 

by return on assets. While there was 

some evidence of improvement in 

asset quality for both assisted and un 

assisted acquirers, there was a lack of 

savings in both interest and noninter 

est expense. As a result, profitability 

Figure 8 

Median Noninterest Expenses 

The 346 Unassisted Acquirers 

As a Percent of Assets 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

-8-7-6-5-4-3-2 1 

Number of Quartets from Acquisition 

did not improve, on average, follow 

ing acquisitions. 

Return on Equity. Figures 13and 14 

present trends in the median return 

on equity among assisted and unas 

sisted acquirers. Among assisted 

acquirers the downward trend in re 

turn on equity prior to the acquisition 

was reversed in the post-acquisition 

period. This improvement was, how 

ever, primarily due to a reduction in 

capitalization, and nor. an improve 

ment in earnings. Among unassisted 

acquirers one finds little change in the 

median return on equity after acquisi 

tions. 

Operating Cost Savings from 

Acquisitions?: Additional 

Considerations 

While the trends in noninterest op 

erating expenses presented in Figures 

7 and 8 indicate little change in costs, 

as a percentage of bank assets in the 

post-acquisition period, additional 

tests were undertaken to respond to 

potential shortcomings in the analy 

sis. First, information on the distribu 

tion of cost changes is useful in 

Core deposits were defined as the sum of all 

transaction accounts, money-market deposit accounts 

and other savings deposits, plus alJ time deposits of less 

than $100,000. 

0 

25 
FDIC Banking Reveiw 

Figure 9 

Median Interest Income and Expense 

The 123 Assisted Acquirers 

As a Percent of Assets 

11 

10 

6 

-8-7-8-5 -4-3-2-10 1 234 

Number of Quarters from Acquisition 

assessing evidence on cost economies 

because it may take several periods 

before operating cost savings can be 

realized. Therefore, changes in oper 

ating costs were measured over an in 

terval beginning eight quarters before 

acquisitions were made and ending 

eight quarters after the acquisitions." 

To control for the effect of changes in 

bank asset size upon dollar operating 

costs, all cost data were measured as a 

percentage of bank assets (as was 

done in Figures 7 and 8). Changes in 

operating costs were measured sepa 

rately for employee compensation 

and expenses on premises. For both 

categories of costs, approximately half 

"The starting point of two years prior to the acqui 

sition was chosen, somewhat arbitrarily, to conLrol for 

[he possibility that acquirers made operating changes 

in anticipation of acquisitions. The tests we re repeated 

using an interval starting one quarter before acquisi 

tions and ending eight quarters after acquisitions. The 

conclusions of this section were unchanged by this 

shorter interval. 

11 The mean percentage change in expenses on 

premises was 11.61 for thesample of assisted acquirers 

and 13.68 for the sample of unassisted acquirers. The 

Student's i statistic for the hypothesis that the mean 

percentage change in expenses on premises is zero was 

B.03 for assisted acquirers and 14.75 for unassisted 

acquirers. 

15 The Student's t statistic for testing the hypothesis 

that the mean percentage change in expenses on sala 

ries and benefits is zero was -1.49 for the sample of 

assisted acquirers and 1.32 for the sample of unassisted 

acquirers. 

of the sample of assisted acquirers ex 

perienced a reduction in costs. Very 

similar results were found for the sam 

ple of unassisted acquirers. Moreover, 

the distributions of proportional cost 

changes were fairly dispersed. 

Approximately 95 percent of both 

assisted and unassisted acquirers ex 

perienced percentage changes in ex 

penses on salaries and benefits of 

between -50 percent and 50 percent 

over the four- year interval. Similarly, 

approximately 72 percent of both as 

sisted and unassisted acquirers expe 

rienced percentage changes in 

expenses on premises of between -50 

percent and 50 percent over the fouryear interval. As a result, neither 

group of acquirers experienced the 

significant reductions in expenses on 

employee compensation and on 

premises in the post-acquisition pe 

riod that would be realized from econ 

omies of scale. In fact, there was a 

small but statistically significant in 

crease in average expenses on prem 

ises over the four-year interval 

studied for both groups of acquirers.H 

Similar tests of the percentage 

changes in average expenses on sala 

ries and benefits indicated no signifi 

cant changes in these costs for both 

group of acquirers.|; 

A second potential criticism of the 

financial trend analysis is that the 

trends included some banks that may 

not be expected to achieve the cost 

savings normally associated with ac 

quisitions. This may be true of acqui 

sitions where the amount of assumed 

assets was relatively small. To test for 

the importance of this factor, tests of 

Percent 

14 

Figure 10 

Median Interest Income and Expense 

The 346 Unassisted Acquirers 

12 

10 

8 

6 

4-7-6-S-4-3-2-10 12345678 

Number of Quartets from Acquisition 
Bank Failure Resolutions 

the size and significance of cost 

changes were repeated, with the aver 

ages weighted toward those acquisi 

tions chat increased bank size the 

most.16 The results from these latter 

tests were similar to the results based 

on unweighted averages, so that con 

clusions about cost savings were un 

changed. 

The proximity of the assumed 

bank to the acquirer may also influ 

ence the degree of potential cost sav 

ings that hanks realize from 

acquisitions. For example, if there is a 

high degree of overlap in branch of 

fice locations for the merging banks, 

large cost savings may be realized 

with the elimination of redundant of 

fices. Therefore, the analysis was re 

peated on groups of assisted and 

unassisted acquirers that operated in 

the same county as the assumed bank. 

As before, all averages were weighted 

coward those acquisitions that in 

creased bank size the most. The re 

sults indicated a significant increase 

in expenses on premises among both 

assisted and unassisted acquirers, 

rather than a decline in costs the prior 

example suggests might occur. In ad 

dition, while similar tests of expenses 

on employee compensation indicated 

Figure 11 

Median Profitability Measures 

The 123 Assisted Acquirers 

As a Percent of Assets 

6 

Net Interest Income; 

Return on Assets 

Provisions fonLoan Losses 

-2 

Net Noninterest Income 

-8-7-6-5 -4-3-2-1 0 1 2 3 4 

Number of Quarters from Acquisition 

a significant decline in such costs for 

unassisted acquirers, there were no 

significant changes in these expenses 

for assisted acquirers. 

third possible shortcoming of the 

financial trend analysis is that it does 

not control for general trends in indus 

try operating costs. It is possible that 

cost reductions achieved through ac 

quisitions were offset by general upFigure 12 

Median Profitability Measures 

The 346 Unassisted Acquirers 

As a Percent of Assets 

6 

Net Interest Income 

Return on Assets 

Provisions for Loan Losses 

-2 j, 

Net Noninterest Income 

-8-7-6-5-4-3-2-10 1 2345678 

Number of Quarters from Acquisition 

ward trends in noninterest expenses 

during the periods studied. In order to 

investigate this possibility the sam 

ples of acquisitions were divided into 

groups with similar acquisition dates 

and financial trends were obtained. 

Next, comparisons were made to the 

trends in industry noninterest ex 

penses over the same time periods for 

groups of banks whose asset size was 

similar to that of the samples of 

acquirers. For brevity, these addi 

tional trends are not presented here. 

In general, the data indicate that ex 

penses on premises and employee 

compensation, as a percentage of 

bank assets, were relatively stable be 

tween June 1984 and December 1990. 

Therefore, it does not appear that cost 

savings from acquisitions were offset 

by industry trends. 

In conclusion, the apparent lack of 

post-acquisition cost savings seen in 

Specifically, weighted mean percentage changes 

in expenses on premises, as well as employee compen 

sation, were computed by weighting the percentage 

change in coses by the proportion of asset growth an 

acquisition represented relative to the combined per 

centage change in assets associated with all acquisi 

tions. 

Subgroups were formed of acquisitions taking 

place within six months of each other. The periods 

investigated were for the Jartcr half of the calendar 

years 1986. 1987, and 1988. 
■ 

FDIC Banking Review 

Figure 13 

Median Return on Equity 

The 123 Assisted Acquirers 

Capital-to-Assets Ratio 

Return on Assets 

-8-7-6-5-4-3-2-1 0 1 2 3 4 

Number of Quarters from Acquisition 

Figures 7 and 8 is supported by the 

additional tests discussed above. 

The Determinants of 

Performance 

The financial performance trends 

presented in the prior section were 

used to assess the relative post-acqui 

sition performance of assisted and un 

assisted acquirers. The main finding 

was that operating efficiency did not 

improve for either assisted or unas 

sisted acquirers. This finding argues 

against the presence of economies of 

scale and scope among the acquirers 

studied here. 

While intuitively appealing, com 

parisons of group financial trends may 

be hindered by differences in the 

composition ofeach group in terms of 

geographic location, asset size, and 

the dates of acquisition. Statistical re 

gression analysis is one technique that 

can be used to control for the effect 

these differences in group composi 

tion have upon bank performance. In 

addition, the regression approach can 

More specifically, standard economic theory is 

based upon the assumption [hat firm managers, acting 

in the interest of firm owners, seek to maximize the 

value of the firm,«., the present discounted value of 

future pro fits. Consequently, managers are assu media 

take a long-run view of rhc firm and consider not only 

the level and riskiness of profits, but also the timing of 

profirs. 

be used to investigate the extent to 

which performance is influenced by 

the level of competition that acquirers 

face, as well as by the composition of 

bank assets and liabilities. Moreover, 

regression analysis can determine 

whether the assurances given by the 

FDIC to assisted acquirers resu Ited in 

a significant subsidy to acquirers. 

Consequently, this section uses re 

gression analysis to further character 

ize the performance of acquirers, as 

well as to investigate some determi 

nants of performance. It should be 

pointed out that this section does not 

attempt to test again for efficiency 

gains associated with acquisitions. If 

such gains were prevalent in the sam 

ple, they would have been seen in the 

financial trends presented earlier. 

An analysis of the determinants of 

an acquirer's financial performance 

requires consideration of a wide range 

of factors. To facilitate the analysis, 

one can distinguish between two gen 

eral categories of determinants. The 

first category consists of those factors 

that affect performance, yet are 

largely beyond the control of bank 

management. These factors include 

regional and national business cycles, 

federal and state bank regulation, tax 

laws, the level of bank and nonbank 

competition, and available production 

technology. After forming expecta 

tions about these basic conditions, 

bank management attempts to select 

that asset and liability composition 

and method of operations which yield 

the maximum profit levels for an ac 

cepted level of risk.18 Therefore, the 

second category of determinants is 

Percent 

14 

Figure 14 

Median Return on Equity 

The 346 Unassisted Acquirers 

12 

10 

8 

-8-7-6-5-4-3-2-1 0 1 23 45 6 78 

Number of Quarters from Acquisition 

28 
Bank Failure Resolutions 

comprised of chose factors over which 

bank management has some control, 

although the degree of control can 

vary. For example, a decision to alter 

the composition of the loan portfolio 

will require some time to implement 

and may be limited by state and fed 

eral bank regulations, as well as the 

available customer base. In addition, 

the distinction between what man 

agement can and cannot control will 

depend upon the time frame of the 

analysis. This study reviewed quar 

terly bank performance for two-year 

periods before and after acquisitions. 

Therefore, changes in asset and liabil 

ity composition certainly fall under 

the heading of managerial decision 

variables. 

Basic Market Conditions 

The trends in financial perfor 

mance presented earlier combined 

the experiences of banks from differ 

ent geographic locations, time peri 

ods, and asset size. To control for the 

influence of regional business cycles 

the country was divided into six geo 

graphic regions and this information 

was included in the regression analy 

sis using dummy variables. The six 

regions were the Northeast, South 

east, West, Southwest, Central, and 

Islands regions (see Table 5).20 

To control for the influence of na 

tional business cycles upon industry 

performance, information on the year 

in which performance was measured 

was included in the regressions, again 

by dummy variables. As a result of the 

requirement that banks have at least 

eight quarters of financial data (four 

quarters before acquisition and four 

quarters after acquisition), both as 

sisted and unassisted acquirer sam 

ples included information for the 

calendar quarter-ends between June 

1984 and December 1990. This pe 

riod covers much of the last regional 

recession in the Southwest associated 

with the fall in energy prices. More 

over, this time span incorporates the 

rapid buildup and subsequent decline 

in residential and commercial real-es 

tate markets in many markets in the 

Southwest and Northeast. 

The financial data presented in 

Figures 1 through 14 show the condi 

tion of acquirers in terms of the num 

ber of quarters from the acquisition 

date. These figures, therefore, com 

bined information from all calendar 

quarters. Some financial data, how 

ever, exhibit seasonal trends.21 In 

order to control for this possibility, 

dummy variables indicating the cal 

endar quarter used were included in 

the regression analysis. 

The level of bank and nonbank 

competition also is an important de 

terminant of bank performance. 

Banks facing little competition can be 

expected to outperform peers operat 

ing in highly competitive markets. 

Traditional economic theory states 

that both the number and size distri 

bution of competitors are important 

determinants of the level of competi 

tion in a market. Consequently, a 

bank's market share is only a partial 

measure of its market power. To put 

market share into perspective one can 

include a summary measure of market 

concentration. This analysis used the 

Herfindahl-Hirshman Index (HHI] 

as an indicator of overall market con 

centration. The HHI is defined as the 

sum of squared market shares of all 

competitors operating within a mar 

ket." The determination of a bank's 

market(s) is, unfortunately, more dif 

ficult because the market will vary 

with bank size, types of loans, popu 

lation demographics, and state 

branching laws. For the majority of 

small banks, the market for most of a 

bank's services, both as a lender and 

deposit taker, is geographically lim 

ited. As a matter of convenience, 

counties were used as geographic 

markets. While county delineations 

will not be appropriate in all circum 

stances, the regression analysis will 

still be able to detect whether high 

(low) market shares and concentra 

tions are associated with higher 

(lower) bank profitability. The only 

data available on banking activity 

across cities and counties are deposits 

at branch offices.23 Therefore, this 

analysis used deposit market shares as 

indices of the level of competition. 

Market shares were computed as the 

percentage of deposits held by an in 

dividual bank within a county, where 

the market was defined to include all 

banks and thrifts operating within a 

county.24 

The notion that market share and 

concentration are related to firm prof 

itability is based upon traditional eco 

nomic theory which states that the 

structure of a market will influence 

the conduct of business rivals, and 

subsequently their performance. This 

Dummy variables arc used to indicate whether a condition or situation is present or not For an observation (bank)r Therefore, dummy variables take on a value of one if the 

condition is present, and zero if it is not- For example, all banks Located in Massachusetts will have a value of one for the dummy variable indicating location in the Northeast, and 

values of zero for all other regional dummy variables. 

If dummy variables for all the regions were included in regression equations of the type esiimared in Tables 8 and 11, (t.e.t regressions with an intercept term included), the 

well-known problem of perfect collincarity would occur. Therefore, it was necessary ro delete a dummy variable for one region from the regression equations. Similar adjustments 

were necessary for other factors felt to influence profits that were introduced through dummy variables, such as the time period, type of branching restrictions, and presence of 

DIC assistance. 

For example, banks generally make greater provisions for loan losses in the fourth calendar quarter. 

The HHJ will increase as the number of firms operating in a market falls, and as [he distribution of market shares becomes mure uneven. For example, the HHI for a market 

comprised ofren firms, each with market shares of ten percent, is 1000. If market shares were altered, such that nine firms had shares of five percent, while the dominant Turn had 

a 55 percent share, the HHI would be 3250. In a monopolized market, the HH] is 10000. 

Commercial and mutual savings banks, as well as savings associations, are required to report branch office deposit data as of the end of June, annually. Bank and thrift branch 

office deposit data were obtained from the FDIC's Summary of Deposits databases. 

Commercial banks offer a variety of services as deposit lakers and creditors, many of which are available at rhrifrs and nonbank institutions such as credit unions and finance 

companies. Unfortunately, data on the activity of credit unionsand nonbank competitors were nor available for this analysis. Therefore, the level of competition is measured with 

some error. 
FDIC Banking Review 

traditional view of these relationships 

is known as the Structure-ConductPerformance (SCP) Paradigm. How 

ever, an alternative view, known as 

the Efficient Structure Hypothesis 

(ESH), states that market concentra 

tion merely reflects that combination 

of firms that have achieved an effi 

cient scale and scope of operations. If 

higher profits accrue to firms with 

large market shares, it is because 

these firms are more efficient, not 

necessarily because they are exerting 

market power. Moreover, there may 

be a tendency for more-efficiently

run firms to accrue greater market 

shares over time, particularly if effi 

ciency can be maintained over a wide 

range of operating scales. As a result 

of these differing theories, interpreta 

tions of the relationships between 

market structure and firm perfor 

mance will not be unambiguous. In 

addition, under either view, the deci 

sion to acquire a competitor alters 

market shares and concentration. 

Therefore, it appears that bank man 

agement can exercise some control 

over market share and, to a lesser ex 

tent, concentration. The next section 

considers those factors over which 

bank management has more direct 

control. 

Finally, state branching restric 

tions may influence bank perfor 

mance in several ways. First, branch 

banks may have different operating 

costs than banks with limited or no 

branching abilities. Second, the abil 

ity to enter markets through branch 

offices may affect the level of compe 

tition banks face. Therefore, dummy 

variables indicating varying levels of 

branching restrictions were used in 

the regression analysis. Specifically, 

those states that prohibit branch 

banking were designated as unit 

banking states. States that permit lim 

ited branching, e.g., branching in 

counties contiguous to the location of 

the main office, were designated as 

limited branching states. Finally, 

those states that permit unlimited 

statewide branching were designated 

as statewide branching states. 

Bank Characteristics 

Bank asset and liability composi 

tion influence overall profitability in 

three ways. First, net interest income 

will be determined by the maturities 

of assets and liabilities, as well as the 

riskiness of assets and volatility of lia 

bilities. Second, lending standards 

and loan concentrations will, in part, 

determine asset quality as reflected in 

the level of nonperforming assets, loss 

provisioning, and loan charge-offs. 

Third, the level and composition of 

bank assets and liabilities characterize 

the scale and scope of operations, 

thereby influencing noninterest oper 

ating costs such as employee compen 

sation and expenses on fixed assets. 

Given these factors affecting prof 

itability, one can expect that the rela 

tionship between certain categories of 

assets and bank profitability will vary 

across geographic regions and over 

time. For example, high loan concen 

trations in certain economic sectors 

such as agriculture, energy, commer 

cial real estate, and loans to lesser de 

veloped nations have varied widely in 

profitability over time. Conversely, 

the influence of several other catego 

ries of assets and liabilities on profit 

ability can be expected to be fairly 

stable. For example, increases in nonearning assets, such as repossessed 

real estate, should always negatively 

impact profits. The inclusion of infor 

mation on geographic regions and the 

year of analysis should partially con 

trol for these variations in influence. 

However, because of the likelihood 

that the relationship between certain 

loan concentrations and profitability 

will be highly dependent upon the 

location and year of analysis, detailed 

information on loan portfolio compo 

sition was not included in the regres 

sion analysis. Instead, broader 

categories of bank assets and liabili 

ties, which were expected to have a 

more stable influence on profitability, 

were used. In addition, in order to 

distinguish between asset composi 

tion and asset quality, separate infor 

mation on asset quality, as measured 

by the level of nonperforming assets, 

was included in the analysis. 

If economies of scale and scope 

exist in banking, one also can expect 

that the effect of some categories of 

assets and liabilities upon profitability 

will vary across banks, depending 

upon a bank's size and portfolio com 

position. For example, if information 

about a commercial loan applicant's 

deposit activity is available to the 

bank, this may improve credit analysis 

and reduce the costs of reviewing loan 

applications. As a result, the profit 

ability of commercial loan portfolios 

may vary with the level of commercial 

deposit accounts, assuming it is these 

depositors who seek loans. No at 

tempt is made here to measure the 

influence of the scope of operations 

upon profitability. 

Finally, assisted acquirers may 

have distinct advantages over unas 

sisted acquirers. The ability to put 

back acquired nonperforming assets 

to the FDIC for a period after acqui 

sition, as well as other governmental 

assurances, may significantly reduce 

the risks involved in assuming assets. 

In order to test for these advantages, 

a dummy variable indicating whether 

the acquirer was assisted was included 

in the regression analysis. 

Regression Methodology 

The regression analysis used a 

"pooled" data set that combined data 

on many banks for several time peri 

ods. Although the pooling of crosssectional and time series data 

increases the information available, 

and hence the efficiency of the esti 

mates, several problems may arise. 

Specifically, if the relationship be 

tween profitability and its determi 

nants changes over time, and/or varies 

across groups of banks, this variation 

must be.accounted for in the estima 

tion procedure. As a result, the analy 

sis employed a variance-components 

model which attempts to correct for 

such variations. This model permits 

the regression model intercept to vary 

across banks, and over time periods. 

For comparative purposes, ordinary 

30 
Bank Failure Resolutions 

least squares estimates are presented 

as well. The ordinary least squares 

procedure does not correct for the 

aforementioned potentially changing 

relationships and, therefore, is less 

precise. 

As stated above, profitability was 

related to broad categories of bank 

assets and liabilities felt to influence 

performance systematically. In order 

to test the sensitivity of results to the 

asset groupings chosen, two specifica 

tions were used. The first specifica 

tion was based upon the standard 

groupings of assets used in bank bal 

ance-sheet statements (see Table 

BA). Balance-sheet classifications are 

generally related to the degree of liq 

uidity and riskiness associated with 

the assets, and therefore served as a 

good starting point for the analysis. In 

addition to these asset groupings, per 

formance was related to the two liabil 

ity measures felt to reflect volatility 

and the use of high-cost funds: 

brokered deposits and deposit bal 

ances over $100,000. Finally, asset 

quality was measured by the level of 

nonperforming assets, defined as 

loans and leases past due 90 days or 

more plus nonaccrual loans and 

leases. 

In the second specification, some 

what broader asset classifications 

were used, based upon risk and assetquality considerations. Total bank as 

sets were partitioned first into nonrisk 

assets and risk assets. Nonrisk assets 

were defined as all cash assets, securi 

ties, federal funds sold, and balances 

due from depository institutions. Sub 

sequently, nonrisk assets were parti 

tioned into noninterest-bearing and 

interest-bearing groups. All remain 

ing assets, which were designated risk 

assets, were partitioned into two 

groups: performing and nonperformore spec i fical ] h r h e variance-corn po nents mode I 

[also known as rtie error-components model) decom 

poses the regression model residuals into three compo 

nents: a time-scries component, a cross-sect ion [ 

component, and the unique residual associated with an 

individual observation. For the estimates presenied in 

this paper, variance-components regressions were esti 

Table 8A 

Regression Analysis of Determinants of Return on Assets 

Assisted and Unassisted Acquirers 

(Quarters 1 through 8) 

Coefficient Estimates 

Model Ordinary Lease Squares 

(t Statistics) 

Variance-Components 

-6.094 

(-2.080) 

0.036 

(1.093) 

0.089 

(2.933) 

0.082 

(2.745) 

0.071 

(2.394) 

0.086 

(2.884) 

0.081 

(0.921) 

-0.039 

(-0.840) 

-0.397 

(-9.931) 

-0.057 

(-1.993) 

-0.015 

(-2.489) 

-0.255 

(-9.912) 

-0.159 

(-2.504) 

-0.140 

(-2.166) 

-0.417 

(-6.194) 

-0.115 

(-0.685) 

-0.110 

(-0.972) 

-0.090 

(-0.511) 

0.112 

(0.818) 

0.038 

(0.284) 

0.171 

(1.123) 

0.607 

(3.300) 

-0.177 

(-0.963) 

-0.201 

(-1.905) 

-0.070 

(-0.783) 

0.022 

(0.275) 

0.121 

(1.178) 

1.86 

mated using generalized least squares estimators State bank branching laws changed over the sample period in many slates. In order to include blanching 

which employed the fitting of constants method of information in regressions that combined data from many pciiod s, states were categorized based on the branching 

estimating the residual components. laws in existence over a majority of the sample period. 

31 
FDIC Banking Review 

ing. Performing risk assets were de 

fined as risk assets minus the sum of 

past due and nonaccrual loans and 

leases, other real estate owned, and 

intangible assets (other than mortgage 

servicing rights). Those broader asset 

groupings expected to be systemati 

cally related to performance are pre 

sented in Table 8B. The liability 

groupings were unchanged in the sec 

ond specification. 

Finally, because the use of deposit 

market share information in the re 

gression analysis required that some 

banks be deleted from the sample, the 

relationships among market share, 

concentration, and profitability were 

studied separately (see Tables 11A 

and I IB). 

Results 

Tables 8A and 8B present esti 

mates of the relationships between 

acquirers' performance and the afore 

mentioned factors (except market 

share and concentration) over the 

two-year period following acquisi 

tions. Table 8A gives the results for 

the first specification, which employs 

the somewhat narrower asset catego 

ries. The estimated relationships be 

tween these asset and liability groups 

and profitability were much as one 

would expect. Variance-components 

model estimates indicate significant26 

positive relationships between re 

turns on assets and all categories of 

earning assets (except assets held in 

trading accounts). Similar results 

were obtained using ordinary least 

squares estimation; however, invest 

ment securities and federal funds sold 

and repurchase agreements were no 

longer significantly related to profitThe term significant is used here in the usual 

starisiical sense 10 mean rhai [tie coefficient estimates 

zibiained from the regressions were found to be signif 

icantly different from sera For this analysis, a Student 

[ statistic of I 96 or more indicates that one can rejecr 

the hypothesis that the coeFFicieot esumaie is no[ sig 

nificantly different from zero at the 95 percent confi 

dence level, 

The earning-assct categories consist of interestbear ing balances due to the bank, investment securi 

ties* federal funds sold and repurchase agreements, net 

loans and leases, and assets held in trading accounts. 

The noneaming-assct categories consist of non

interest-bearing balances, premises and fixed assets, 

and Olhcr real csiate owned (which includes repos 

sessed real estate). 

ability. The nonearning assets, other estimation procedures. State branch 

real estate owned, and nonperforming ing restrictions did not appear to be 

assets were found to be significantly significantly related to profitability. 

negatively related to profitability More importantly, both estimation 

under both estimation procedures.3 procedures failed to find a statistically 

Similarly, increases in the two mea significant subsidy to the sample of 

sures of high-cost funds also were failed-bank acquirers. Although the 

found to reduce profitability. In addi coefficient on the dummy variable 

tion, the results in Table 8A for the used to indicate whether an acquisi 

nonfinancial determinants of profit tion was FDIC assisted was relatively 

ability were very similar under both large and positive, the estimated coefTable 8B 

Regression Analysis of Determinants of Return on Assets 

Assisted and Unassisted Acquirers 

(Quarters 1 through 8) 

Coefficient Estimates (t Statistics) 

Model Ordinary Least Squares Variance-Components 

-3.504 

(-2.486) 

0.054 

(3.709) 

0.057 

(3.817) 

-0.313 

(-15.203) 

-0.070 

(-2.459) 

-0.013 

(-2.176) 

-0.157 

(-2.467) 

-0.147 

(-2.261) 

-0.420 

(-6.249) 

-0.151 

(-0.893) 

-0.147 

(-1.283) 

-0.028 

(-0.158) 

0.001 

(0.008) 

0.014 

(0.107) 

0.028 

(0.188) 

0.524 

(2.854) 

-0.126 

(-0.690) 

-0.165 

(-1.582) 

-0.041 

(-0.453) 

0.025 

(0.311) 

0.130 

(1.273) 

1.87 

32 
ank Failure Resolutions 

Table 9 

Changes in Deposit Market Share Upon Acquisition 

Assisted Acquirers 

ficients were not statistically signifi 

cant. Finally, the regression mean 

square error for the variance-compo 

nents model (1.86) was lower than 

that obtained from ordinary least 

squares estimation (2.27), indicating 

the variance-components model was 

somewhat more precise. 

Table 8B presents the results of 

the regression analysis using the sec 

ond approach to grouping assets. The 

second specification uses somewhat 

broader classifications of assets, 

where the groupings were based upon 

risk and performance considerations. 

The second specification resulted in 

a stronger relationship between prof 

itability and asset groupings than 

found under the first approach. Per 

forming risk and nonrisk assets were 

significantly positively related to prof 

itability under both estimation meth 

ods. In addition, increases in 

nonperforming assets and other real 

estate owned, as well as high-cost 

funding, were found to reduce profit 

ability. The most interesting result in 

Table 8B is that ordinary least squares 

estimates indicated a significant posi 

tive subsidy to failed-bank acquirers. 

However, estimates obtained from 

the variance-components model did 

not show a statistically significant sub 

sidy. In addition, the variance-compo 

nents model estimates appear to be 

more precise than the ordinary least 

squares estimates, as indicated by the 

The 1984 Department oFJusiicc Merger Guide 

lines define three levels of concentration, based upon 

the Herfindahl-HirscJiman indcv (HHT) of deposit 

marker concert trail on. Those markets with an HHI of 

1600 or more arc considered to be highly con centra ted, 

while markets with an HHI between 1000 and 1800 are 

considered xo be moderately concentrated and markers 

with an HHI under 1000 are considered to have low 

lower regression mean square error 

under the variance-components 

model. Therefore, there does not ap 

pear to be strong evidence of FDIC 

subsidization for this group of 

acquirers. 

Before presenting estimates of the 

relationships among market share, 

concentration and bank profitability, 

it would be useful to know what im 

pact acquisitions had upon market 

share and concentration. Tables and 

10 present estimates of the changes in 

deposit market shares associated with 

acquisitions. Market share data are 

available each June. Hence, the pre

acquisition period -1 was defined as 

the June prior to acquisitions, period 

0 as the first June after acquisitions, 

and period 1 as the second June after 

acquisitions. The geographic markets 

used were counties. 

Tables9and 10 includeonly those 

acquirers operating in the market 

prior to acquisitions. Acquisitions that 

expanded geographic markets were 

excluded. 

Table 9 indicates that among this 

group of assisted acquirers, median 

market shares rose approximately 40 

percent, from 12.7 to 19.5 percent, 

afteracquisitions. Inaddition, median 

market concentration levels for as 

sisted acquirers increased by 182 

points, based upon a scale of 1 to 

10000.29 Among the group of unas 

sisted acquirers, median market 

shares increased 25 percent after ac 

quisitions, while median market con 

centration fell. This decline in 

concentration is due to offsetting 

changes in the market shares of com 

peting banks. While this measure of 

market shares is not precise, Tables 9 

and 10 show that for these groups of 

acquirers, market shares may have in 

creased significantly with acquisi 

tions. 

Estimates of the relationships 

among market share, concentration 

and bank profitability are compli 

cated by the fact that many banks 

operate in several banking markets. 

In these situations one cannot associ 

ate a particular measure of market 

share with bank profitability. This 

problem was solved by examining 

banks that operate in only one geo 

graphic market. Because the geo 

graphic markets used here are 

counties, che sample of one-market 

banks may tend to be biased toward 

smaller banks, as well as banks oper 

ating in states that restrict branching. 

The restriction that banks operate in 

only one market reduced the sample 

of assisted acquirers from 123 to 61, 

and the sample of unassisted 

acquirers fell from 346 to 151. 

Tables 11 A and B present esti 

mates of the relationships between 

acquirers' profitability and market 

share and concentration, as well as the 

previously discussed financial and 

Table 10 

Changes in Deposit Market Share Upon Acquisition 

Unassisted Acquirers 

^oncenrrauon. 

33 
nonfinancial factors. Data for two pe 

riods before and after acquisitions 

were used so that the effect of in 

creased market share upon profitabil 

ity could be investigated.30 The 

results indicate a weaker relationship 

between profitability and several of 

the asset and liability categories pre 

viously found co affect profitability. 

Interest-bearing nonrisk assets, per 

forming risk assets, and deposits of 

$100,000 or more, were not signifi 

cantly related to returns on assets for 

thesampleofone-marketacquirers.lt 

is possible that these weaker results 

were due, in part, to the substantial 

decline in the number of banks in 

cluded in the sample (from 469 to 

212). Moreover, market share and 

concentration were, in general, found 

to have no significant effect upon 

profitability. This latter result is 

somewhat surprising, given the large 

increase in market share some as 

sisted acquirers achieved (see Table 

9). One should keep in mind, how 

ever, that all the acquisitions studied 

here had to meet antitrust standards 

meant to maintain market competi 

tion, in order to be approved by bank 

regulators. Therefore, all attempts to 

measure potential market power in 

banking are limited by the operation 

of antitrust law. 

Comments and Conclusions 

The experience of the sample of 

assisted acquirers appears to be very 

similar to that of unassisted acquirers. 

Both groups of acquirers appear to 

have managed the often substantial 

increase in bank size that occurred 

with acquisitions without major prob 

lems. Indeed, asset quality improved, 

on average, following acquisitions and 

acquirers were able to maintain prof 

itability. Despite these positive 

Data on deposit market shares are only available 

as of the end of June. Therefore, ir was not possible to 

include more than four periods in the sample. In addi 

tion, because all data are for the second quarter of the 

year, the dummy variables controlling for the calendar 

quarter were no longer needed. 

FDIC Banking Review 

Table 11A 

Regression Analysis of Determinants of Return on Assets 

Assisted and Unassisted Acquirers Operating in One Market 

(Data for two periods before and after acquisitions) 
35 
FDIC Banking Review 

Recent Developments Affecting 

Depository Institutions 

by Benjamin B. Christopher1 

Regulatory Agency Actions 

Federal Deposit 

Insurance Corporation 

Proposals for Higher 

Assessment Rates and 

Transitional Risk-Related 

Premium System 

The FDIC proposed raising the 

Bank Insurance Fund (BIF) and 

Savings Association Insurance Fund 

(SAIF) rates from 23 cents per$100 of 

domestic deposits to 28 cents per 

$100. Separately, the agency pro 

posed to implement a transitional 

risk-related system starting January 1, 

1993, a year ahead of the January 1, 

1994, statutory deadline for adopting 

a permanent system. 

The premium increase proposals 

are intended to raise the reserves of 

the BIF and SAIF. The Financial In 

stitutions Reform, Recovery, and En 

forcement Act of 1989 (FIRREA) 

requires the FDIC to increase in 

surance fund reserves to $1.25 for 

every $100 of insured deposits. 

Official audits of the BIF and SAIF 

are still being conducted, but the 

most recent information indicates that 

the funds' ratios are substantially 

below the target levels. The BIF is 

likely to have finished 1991 with a 

deficit of about $7 billion, while the 

SAIF's reserves at year-end 1991 were 

approximately zero. 

The separate proposal for riskrelated premiums is intended to make 

the deposit insurance system fairer to 

well-run institutions and encourage 

weak institutions to improve their 

condition. Currently, all FDIC-in

sured institutions pay the same 

premium (now 23 cents per $100 of 

domestic deposits) regardless of the 

riskiness of their operations. How 

ever, in December 1991, the Con 

gress enacted the Federal Deposit 

Insurance Corporation Improvement 

Act of 1991 (FDICIA) that requires 

the agency to implement a per 

manent, risk-related premium system 

by January 1, 1994. 

Under the transitional risk-related 

system, the FDIC would place each 

insured institution in one of nine risk 

categories based on their level of capi 

tal and other relevant information. 

There would be a six basis point 

spread between the highest and the 

lowest premiums. Based on the 

proposed premium increase to 28 

cents per $100, the strongest would 

pay 25 cents per $100 and the weakest 

would pay 31 cents per $100. How 

ever, FDIC staff expects to recom 

mend that the permanent risk-related 

premium system, to be implemented 

in 1994, incorporate a wider differen 

tial as well as semiannual or annual 

increases in premium rates for highrisk institutions. 

Each insured institution would be 

assigned to one of three capital groups 

(well-capitalized, adequately capital 

ized or less than adequately capital 

ized) to be defined by the federal 

banking agencies. Within the capital 

groups, the FDIC then would assign 

each institution to one of three sub 

groups based on its evaluation of the 

risk posed by the institution. The 

FDIC would base this judgment on 

evaluations by the institution's 

primary federal or state supervisor, 

statistical analyses of financial state 

ments and other information relevant 

to gauging the risk posed by the in 

stitution. These supervisory evalua 

tions would be used to modify 

premium rates within each capital 

group. 

The FDIC is asking for comment 

on all aspects of the proposal, includ 

ing: whether to begin a transitional 

risk-related system prior to January 1, 

1994; how an appeals process should 

be established for institutions wish 

ing to challenge their risk classifica 

tion; whether risk-related premiums 

•Benjamin B. Christopher is a financial economist 

in the FDIC's Division of Research and Statistics. 

Reference sources. American Banker {AU); Wai/ 

Sln:erJoiinia/<.WS}y, 

Federal Register iFR). 

36 
Recent Developments 

should be assigned to institutions by 

purely statistical factors, without any 

room for supervisory evaluations; and 

whether the FDIC's risk assessments 

for each institution should be kept 

confidential. PR-77-92, FD1C, 51/2/92. 

Brokered Deposits 

The FDIC proposed a regulation 

co implement amendments to the 

Federal Deposit Insurance Act con 

tained in FDICIA, regarding the ac 

ceptance of brokered deposits by 

insured depository institutions, and 

the imposition of certain recordkeep

ing and reporting requirements. FR, 

4/3192,p. 11442; FIL-31-92, FDIC, 4/10. 

Prior to FDICIA, "troubled" in 

stitutions were prohibited from ac 

cepting, renewing, or rolling over 

brokered deposits. The FDIC could, 

by waiver, permit such institutions to 

accept brokered deposits. FDICIA 

provides that: a) "well capitalized" in 

sured depository institutions may ac 

cept, renew, or roll over brokered 

deposits without first obtaining a 

waiver from the FDIC; b) those that 

are "adequately capitalized" are 

prohibited from accepting, renewing, 

or rolling over brokered deposits un 

less they first obtain a waiver from the 

FDIC; and c) "undercapitalized" in 

stitutions (including those that have 

previously obtained a waiver) are 

prohibited from accepting, renewing, 

or rolling over brokered deposits. 

"Adequately capitalized" (including 

those that obtain a waiver) and "un 

dercapitalized" institutions are 

prohibited from soliciting deposits by 

offering interest rates that are sig 

nificantly higher than the prevailing 

rates on insured deposits in their nor 

mal market area or in the market area 

where such deposits would otherwise 

be accepted. 

To implement FDICIA, the FDIC 

proposed that institutions with two 

key capital ratios (leverage capital and 

risk-weighted capital) between oneand-two percentage points higher 

than is otherwise required and are 

highly rated on the interagency sys 

tem for safe-and-sound operations 

("1" or "2" rated) would be considered 

"well capitalized." These institutions 

could accept brokered deposits 

without limit and are not subject to 

interest-rate restrictions. Institutions 

that fail to meet the definition of 

"well capitalized" but still are above 

the minimum levels of required capi 

tal would be considered "adequately 

capitalized." These institutions could 

accept brokered deposits subject to an 

FDIC waiver and interest-rate restric 

tions. Institutions that fail to meet 

either of the two capital ratios would 

be considered "undercapitalized" 

and therefore barred from accepting 

brokered deposits. 

Deposit brokers also would be re 

quired to register with the FDIC and 

to maintain information that the agen 

cy could obtain upon request. The 

proposal would not require brokers to 

file regular reports with the agency. 

F1L-3-92, FDIC, 1/9; PR-48-92, 3/24. 

Capital Maintenance 

In order to promote consistent and 

uniform treatment of intangible assets 

among the federal banking regulators, 

the FDIC proposed that limited 

amounts of purchased mortgage 

servicing rights and purchased creditcard relationships would be recog 

nized for purposes of calculating Tier 

1 capital under the agency's leverage 

capital and risk-based capital stand 

ards. All other intangible assets, in 

cluding goodwill and core deposit 

intangibles, would continue to be 

deducted in determining the amount 

of Tier 1 capital. 

The aggregate amount of PMSRs 

and PCCRs that could be recognized 

for regulatory capital purposes will be 

limited to no more than 50 percent of 

core capital. In addition, the amount 

of PCCRs would be subject to a sublimit of no more than 25 percent of 

core capital. Certain other conditions 

and restrictions pertaining to these in 

tangibles would also apply. FR, 4/1/92, 

p 11005. 

Capital for Multifamily 

Housing Loans 

The FDIC proposed to amend its 

guidelines to implement a provision 

of the Resolution Trust Corporation 

Refinancing, Restructuring, and Im 

provement Act of 1991 which requires 

the federal banking agencies to assign 

a 50 percent risk weight to multifami 

ly housing loans that meet certain 

prudential criteria and to securities 

collateralized by such loans. Current 

ly, the risk weight for these loans is 

usually 100 percent. Among the 

criteria are that a loan be secured by a 

first lien on a property generating a 

specified minimum ratio of net in 

come to debt service, has a maturity 

between seven years and 30 years, 

and has had timely principal and in 

terest payments for at least one year. 

FIl-29-92, FDIC, 4/10; FR, 4/1,p. 11010. 

Loans to Bank Executive 

Officers 

Under a recent statutory amend 

ment, insured nonmember banks are 

prohibited from making loans to their 

executive officers for purposes other 

than financing the education of the 

officers'children or financing the pur 

chase, construction, maintenance or 

improvement of the officers' homes 

except to the extent authorized by the 

FDIC. 

The FDIC amended its regula 

tions to allow an insured nonmember 

bank to make extensions of credit to 

its executive officers for any other 

purpose if the aggregate outstanding 

balance on such loans (loans other 

than education or home finance loans) 

to the executive officer do not exceed 

the higher of 2.5 percent of the bank's 

capital and unimpaired surplus or 

$25,000, but not to exceed $100,000. 

PR-66-92, FDIC, 4/21; FR, 3/4/92, p. 7670; 

4/28, p. 17847. 

Notice Requirements for 

Closing Branches 

FDICIA requires an insured 

institution to give notice of any 

proposed branch closing to its 
FDIC Banking Review 

appropriate federal banking agency 

no later than 90 days prior to the date 

of the proposed branch closing. The 

required notice must include a 

detailed statement of the reasons for 

the decision to close the branch and 

statistical or other information in sup 

port of such reasons. It also requires 

insured institutions to give notice of 

any proposed closing to their cus 

tomers. Finally, insured institutions 

must post a notice in a conspicuous 

manner on the premises of the branch 

to be closed at least 30 days prior to 

the proposed closure. FiL-05-92, FDIC, 

1110/92. 

Pending the adoption of a final 

rule, and to encourage acquirers to 

provide banking services to a com 

munity during the transition period 

after the failure of an insured institu 

tion, the FDIC will not take any ac 

tion against an FDIC-supervised 

bank for non-compliance with ad 

vance notice requirements, provided 

that the bank meets certain require 

ments, among which are that it tem 

porarily operates, but does not 

purchase or lease, one or more 

branches of a failed institution; during 

the option period, makes its "best ef 

forts" to give that branch's customers, 

and the FDIG, as much notice as is 

reasonable under the circumstances; 

and closes the branch within 90 days 

after notifying the FDIC of its inten 

tion to close the branch. FIL-30-92, 

FDIC, 4/10192. 

Interagency Statement on 

Review of Commercial 

Real-Estate Loans 

The Office of the Comptroller of 

the Currency (OCC), FDIC, the 

Federal Reserve Board (FRB) and the 

Office of Thrift Supervision (OTS) 

issued a joint policy statement on the 

review and classification of commer 

cial real-estate loans. To ensure that 

regulatory policies and actions do not 

inadvertently curtail the availability 

of credit to sound borrowers, the four 

federal regulators of banks and thrifts 

have taken a number ofsteps to clarify 

and communicate their policies, in 

cluding the present statement. In the 

spring of 1991, the four agencies is 

sued general guidelines on super 

visory policies that discussed the 

workout of problem loans, lending by 

under-capitalized institutions, and 

the valuation of real-estate loans (see this 

Review, Spring/Summer, 1991, p. 36). 

The most recent policy statement 

emphasizes that the evaluation of 

real-estate loans is not based solely on 

the value of the collateral, but on a 

review of the borrower's willingness 

and capacity to repay and on the in 

come-producing capacity of the 

properties. It also provides guidance 

on how supervisory personnel analyze 

the value of collateral. Among the 

specific topics covered are the general 

principles that examiners follow in 

reviewing commercial real-estate loan 

portfolios, the indicators of troubled 

real-estate markets, and review of in 

dividual loans, including the use of 

appraisals and the determination of 

collateral value. News Re/ease, OCC, 11/7/91. 

FDIC Will Manage Savings 

Bank in Receivership Case 

The OTS placed CrossLand 

Savings, FSB, Brooklyn, N.Y., in 

receivership and chartered a new 

federal mutual institution, CrossLand 

Federal Savings Bank, which will as 

sume certain assets and liabilities of 

CrossLand Savings. The receivership 

does not affect CrossLand's wholly 

owned savings association subsidiary 

in Utah. CrossLand Federal, whose 

accounts are insured by the BIF, will 

operate under the management of the 

FDIC. The FDIC will provide $1.2 

billion initially to enable CrossLand 

Federal to meet its capital requirements. 

Shareholders in CrossLand Savings, 

which wasafederally chartered stock in 

stitution, will retain no interest in the 

new thrift. 

GrossLand'scondirion is due primari 

ly to a high level of nonperforming assets 

and an over-concentration of high-risk 

loans. The institution had been operat 

ing under regulatory loan and invest 

ment restrictions since December 1990. 

OTS Director Timothy Ryan said 

that "Congress has mandated that 

regu lators seek the least cost means to 

resolve failing banks and thrifts.. .The 

FDIC decided that the least costly 

alternative available is to recapitalize 

the institution and operate it under 

new management and FDIC over 

sight until a final resolution can be 

effected. . .Our main objective is to 

protect the deposit insurance fund 

and save taxpayers' money, and I en 

dorse the action the FDIC has taken 

to achieve that goal." NEWS, OTS, 

1/24/92. 

Supervisory Definition of 

Highly Leveraged 

Transactions 

The FDIC, the OCC, and the FRB 

intend to phase out the definition of 

highly leveraged transactions and dis 

continue the reporting of HLTs by 

banking organizations after June 30, 

1992. The definition has largely ac 

complished its original purposes, such 

as encouraging financial institutions 

to focus on the need for internal con 

trols and ways to monitor this type of 

transaction, and the need to structure 

HLTs in a way that is consistent with 

the risks involved. 

Until the phaseout is complete, the 

supervisory definition and the report 

ing requirements will continue, with 

certain changes that include shorten 

ing the time period that companies 

are considered to be in HLT status if 

they meet certain performance stand 

ards or other criteria, and excluding 

loans secured by cash or cash 

equivalents from the definition. FIL

14-92, FDIC, 2/18; FR, 2/11192,p. 5040. 

Appraisal Regulations 

FDICIA postponed until not later 

than December 31, 1992, the date 

when federally regulated depository 

institutions must use state-certified or 

state-licensed appraisers in connec 

tion with certain real-estate transac 

tions. Part 323 of the FDIC's 

regulations, which includes appraisal 

standards and other related provisions 
Recent Developments 

chat took effect on September 19, 

1990 remains in force (see this Re 

view, Spring/Summer, 1991, p. 37). 

The use of certified or licensed ap 

praisers in specified transactions was 

mandated by FIRREA. The exten 

sion to December 31, 199Z, helps 

facilitate an orderly, nationwide im 

plementation of FIRREA by giving 

the states additional time to imple 

ment their appraiser qualification 

standards. Although the new federal 

law would permit institutions to use 

any qualified appraiser until Decem 

ber 31, 1992, states are allowed to 

make their licensing and certification 

programs effective before the federally 

mandated deadline. FIL-4-92,FDIC,i113192. 

The FDIC approved amendments 

to its regulations that increase from 

$50,000 to $100,000 the loan amount 

that will trigger certain existing re 

quirements. Transactions below 

$100,000 remain subject to active 

federal supervision. Any real-estate 

transaction not covered by the regula 

tions still must be supported by an 

appropriate estimate of value 

prepared in accordance with existing 

guidelines for real-estate appraisals 

and review procedures. 

Also approved are certain exemp 

tions from the appraisal requirements, 

among which are a loan that has 

received an appraisal in connection 

with a guarantee or insurance by an 

agency of the federal government, 

such as the Veterans Administration, 

and a 1-4 family residential mortgage 

loan to be sold by the bank to the 

secondary market and meeting the 

underwriting standards of the Federal 

National Mortgage Association or Federal 

Home Loan Mortgage Corporation. 

The amendments, effective March 

16, 1992, are similar to existing or 

proposed rules at the other federal 

bank and thrift regulatory agencies. 

PR-37-92, FDIC, 3110/92; FR, 3/16, p. 9043. 

Applications for 

Deposit Insurance 

FDIC adopted a policy regarding 

deposkinsurance applications, updat 

ing policies first issued in 1980 and 

1987. The policy covers applications 

from existing institutions operating 

without federal deposit insurance as 

well as proposed new banks in or 

ganization, including institutions 

being formed for the sole purpose of 

acquiring a failed bank or thrift. 

One major change increases from 

$750,000 to $2 million the normally 

expected minimum initial capitaliza 

tion for proposed new institutions 

seeking federal insurance. The FDIC 

will consider approving an application 

with a lower amount provided there 

are "compelling circumstances." In 

addition, the initial capital must be 

sufficient to provide a projected ratio 

of Tier 1 leverage capital of at least 

eight percent at the end of the third 

year of the institution's operation. 

New institutions proposing operating 

plans that rely on high-risk lending, 

niche marketing, significant funding 

from sources other than core deposits 

or that otherwise diverge from tradi 

tional banking will require extensive 

documentation as to the suitability of 

the activities. 

There are other significant chang 

es or clarifications, among which are 

that organizers, including holding 

companies, demonstrate the ability to 

support the new institution's opera 

tions and provide capital, and institu 

tions must agree to obtain an 

independent audit for at least the first 

five years after insurance coverage is 

granted. Effective when published in 

the FederalRegister. PR-S9-92,FD/C,4/7. 

Deposit Insurance Coverage 

for Participants in 457 

Plans 

The FDIC will amend its regula 

tions to conform to provisions of 

FDICIA which require that each par 

ticipant in a 457 plan, which is a 

deferred compensation plan mainly 

for state and local government 

employees and tax-exempt organiza 

tions, be covered up to the statutory 

limit of $100,000 of federal deposit 

insurance. 

Previously, FDIC regulations 

restricted deposit insurance for 457 

plans to $100,000 per plan, rather than 

per participant. Those regulations 

were scheduled to go into effect on 

January 29, 1992, or in the case of a 

time deposit, the first maturity date 

thereafter. The new legislation essen 

tially cancels that effective date and 

permits per-participant coverage to 

continue uninterrupted. The statute 

requires, however, that beginning 

December 19, 1992, the FDIC will 

not provide pass-through insurance if 

at the time the deposits are accepted 

the institution is prohibited from ac 

cepting brokered deposits because it 

does not meet minimum capital re 

quirements, or it is adequately capi 

talized but has not applied to the 

FDIC for permission to accept 

brokered deposits. PR-192-91, FDIC, 

12120/91. 

Restrictions on Deposittaking Activities ofForeign 

Banks 

FDIC-supervised financial institu 

tions were notified, in a statement 

released jointly by the OCC, FRB, 

and FDIC, of provisions of FDICIA 

that restrict the deposit-taking ability 

of foreign banks operating in the U.S. 

The statement provides guidance to 

foreign banks until the agencies can 

promulgate rules or issue clarifying in 

terpretations. 

The new legislation amends the 

International Banking Act of 1978 to 

provide that after the date of enact 

ment a foreign bank may accept or 

maintain deposit accounts having 

balances of less than $100,000 only 

through an insured U.S. subsidiary 

bank. grandfather provision permits 

insured branches of foreign banks in 

existence on the date of enactment to 

continue their operations. Foreign 

banks may not establish new in 

sured branches after the date of 

enactment. 

The statement also notes that 

there are unresolved questions con 

cerning the scope of the new legisla 

tion. FlL-1-92-92, FDIC, 1/2. 
FDIC Banking Review 

Ownership Reports and 

Trading by Bank Officiate 

The FDIC is adopting amend 

ments to its rules regarding the filing 

of ownership reports by officers, 

directors, and principal security 

holders, of insured state-chartered 

nonmember banks, and the exemp 

tion of certain transactions from the 

short-swing profit recovery provisions 

of Section 16 of the Securities Ex 

change Act of 1934. 

The amendments make the 

FDIC's securities disclosure require 

ments substantially the same as those 

of the Securities and Exchange Com 

mission in accordance with Section 

12(i) of the Securities Exchange Act 

of 1934. Among the new require 

ments are that each registered bank 

annually disclose the name of each 

person who failed to file, or filed late, 

the required form for reporting 

securities transactions. The amend 

ments are effective March 9, 1992, 

with some provisions having delayed 

effective dates. FIL-15-92,FDIC,2/!9,-FR, 

2/7, p. 4699. 

Reporting of Bank Officers' 

Indebtedness 

The FDIC distributed information 

to banks for their compliance with 

Title VIII of the Financial Institu 

tions Regulatory and Interest Rate 

Control Act of 1978 (FIRIRCA), 

which requires each bank's executive 

officers and principal shareholders to 

submit an annual report to their board 

of directors on their indebtedness and 

that of their related interests to cor 

respondent banks. Also, under the 

FDIC's regulations, a bank must dis 

close to the public, upon request, the 

names of its executive officers and 

principal shareholders who have in 

debtedness to their own bank or to 

correspondent banks which exceeds a 

specified amount. F1L-58-91, FDIC, 12/9191. 

Regulatory Review 

The FDIC is soliciting public com 

ment on which of its regulations and 

programs impose unnecessary or ex 

cessive costs or burdens and what 

changes can be made to reduce those 

costs or burdens. This action is being 

taken to comply with President 

Bush's request that federal regulatory 

agencies evaluate existing regulations 

and programs and identify and accel 

erate action on initiatives that will elimin 

ate any unnecessary regulatory burden. 

Section 221 of FDICIA requires 

the Federal Financial Institutions Ex 

amination Council (FFIEC) to con 

duct a study on regulatory burden 

with respect to insured depository in 

stitutions. The FFIEC must submit a 

report to Congress describing the 

identified revisions not later than 

December 19, 1992. FR,3/9/92,p. 8282. 

Negligence Criteria for 

FDIC Lawsuits 

A panel of the U.S. Court of Ap 

peals for the 10th Circuit in Denver 

upheld the FDIC's right to sue bank 

officers and directors on the basis of 

simple negligence under state law. 

The Court ruled that FIRREA allows 

a state to impose a higher standard 

than the gross negligence standard ex 

plicitly provided for in federal law. 

The ruling appears to be the first for 

the FDIC based on simple 

negligence. Other courts have consis 

tently held that a gross negligence 

standard must be violated by a bank 

officer or director. Texas Banting, 1/92, p. 25. 

The full Court for the 10th Circuit 

vacated the ruling and agreed to hear 

the case. AB, 4124/92, p. 2. 

Minorities and Women 

Outreach 

The FDIC adopted a rule, as 

authorized by FIRREA, to maximize 

the participation of minorities and 

women in all contracts it awards, ef 

fective May 26, 1992. In February 

1990, the FDIC adopted an interim 

program to ensure such participation. 

The final rule provides for: identi 

fication of minority and womenowned firms capable of providing 

goods and services to the FDIC; cer 

tification of identified firms; promo 

tion of the program; guidelines for the 

solicitation of contracts that promote 

the participation of minority- and 

women-owned firms in FDIC con 

tracting; and oversight and monitoring 

of the program. FR,4/24/92,p. 15004. 

Fair Housing 

The FDIC revised its fair housing 

regulation to comply with recent 

amendments to the Home Mortgage 

Disclosure Act (HMDA) and the 

Federal Reserve's Regulation C. 

The changes eliminate duplicative 

reporting of information on home loan 

log-sheets, enabling the banks to 

maintain a HMDA register in the Reg 

C format by recording data as to race 

or national origin, sex, and income for 

all applicants, and entering all re 

quired information on the register 

within 30 calendar days after final dis 

position of the loan application. FIL

52-91, FDIC, !0/3I/9J;FR, 10/3, p. 50034. 

Claims Against Officials and 

Advisors of Failed 

Institutions 

With respect to banks that failed 

since January 1,1985, the FDIC filed 

150 lawsuits against their former 

directors and officers and 19 suits 

against their attorneys and accountants 

through December31,1991. In addition, 

the FDIC received from the Federal 

Savings and Loan Insurance Corpora 

tion (FSLIC) or instituted as manager 

of the FSLIC Resolution Fund (FRF) 

approximately 276 lawsuits against 

former directors, officers and profes 

sional advisors of failed savings institu 

tions. At the end of 1991, 133 lawsuits 

filed by the FDIC were pending against 

former directors, officers and profes 

sional advisors of failed banks and their 

insurers, and 163 lawsuits were pending 

against former directors, officers and 

professional advisors of failed thrifts, 

excluding suits filed directly against 

bankers' blanket bond carriers. 

Since 1985, the FDIC recovered 

$1.1 billion from all professional 

liability claims. An additional $34.1 

million was recovered by the FDIC 

Legal Division for the RTC. 

The FDIC's lawsuits against direc 

tors and officers generally are tort 

claims for breach of fiduciary duty. As 

40 
Reccni Developmenis 

with any litigation, the FDIC con 

fronts some difficulties in pressing its 

D&O claims, one of which is match 

ing its potential claims with collec 

tible assets, or potential sources of 

recovery. Perhaps the most potential 

ly serious difficulty confronting pur 

suit of D&O claims by the FDIC is 

[he so-called "regulatory exclusion" 

in many D&O liability insurance 

policies. The exclusion purports to 

avoid insurance coverage for any suits 

brought by the FDIC or by any other 

governmental agency, even though 

the same or similar suit would be 

covered if it were instituted by 

another claimant, such as former 

shareholders of a failed institution. 

The FDIC has vigorously opposed 

the regulatory exclusion. Testimony of 

A.J.T. Byrne, Genera/ Counsel, FDIC, before U.S. 

House Subcommittee on General Oversig/il and In 

vestigations, 2J20I92. 

Banks Examinedfor 

Community Reinvestment 

The FDIC issued a consolidated 

list of all state nonmember banks 

evaluated for compliance with the 

Community Reinvestment Act of 

1977 (CRA) since FIRREA mandated 

public disclosure of an evaluation for 

each bank. The consolidated list, 

covering the period July 1, 1990 

through August 1991, includes the 

rating assigned to each bank ex 

amined during that period. The 

decision to release tile rating for each 

institution was made jointly by the 

financial institutions regulatory agen 

cies. PR-I57-91, FDIC, 10/25191. 

FDIC-State Coordination of 

Bank Examinations 

The FDIC and the Conference of 

State Bank Supervisors (CSBS) 

agreed on how cooperative examina 

tions will be undertaken between 

state authorities and the FDIC. This 

agreement will significantly ease the 

regulatory burden for the nation's 

7,200 state-chartered nonmember 

banks. FDICIA mandates annual fullscope examinations for all banks over 

$100 miltton in assets and permits the 

FDIC to accept state examinations on 

an alternating year basis. 

Each state will enter into in 

dividual agreements with the FDIC, 

thus allowing states and the FDIC to 

take full account of local economic 

and industry conditions as they plan 

their examinations. The model agree 

ment provides that the states and the 

FDIC would examine highly rated 

banks (CAMEL rating 1 or 2) on an 

alternating basis, subject to local con 

ditions and the current condition of 

the bank. The FDIC and state 

authorities would coordinate the 

timing of their examinations to the 

maximum extent possible. For banks 

rated 3, 4, or 5, examining authorities 

would confer regularly and agree on 

the most effective examination 

schedule in order to properly monitor 

a bank's safety and soundness. Ex 

aminations could be on an alternating, 

independent, joint or concurrent 

basis, depending on the severity of a 

bank's problems. PR-65-92, FDIC, 

4121192. 

Guidelines for Outside Legal 

Assistance 

The FDIC's Legal Division issued 

a Guide to inform outside law firms as 

to the eligibility requirements for 

providing legal services to the FDIC. 

The Guide also sets forth the policies 

and procedures governing the Legal 

Division's relationship with outside 

counsel. Among the many topics 

covered are conflicts of interest, rate 

structure and expenses, conduct of 

litigation, billing, staffing, travel and 

other expenses, and ethical considera 

tions. Guide For Outside Counsel, FDIC, 

December 1991. 

Survey Finds Housing 

Markets Improving, 

Commercial Segment 

Lagging 

Conditions in many housing 

markets improved into the new year 

but problems persist in the commer 

cial real-estate sector, according to the 

FDIC's quarterly survey. The survey 

is based on nationwide interviews 

with nearly 500 senior examiners and 

liquidators at federal bank and thrift 

regulatory agencies, and represents 

the assessment of trends in real-estate 

market conditions between late Oc 

tober and late January. 

The survey's composite index for 

both residential and commercial realestate markets nationwide was 60 in 

January—up from 57 in October, but 

lower than for last July (64). Values 

above 50 indicate that more respon 

dents said local real-estate conditions 

were improving than cited a decline, 

and values below 50 indicate the op 

posite. On a regional basis, the 

strongest results during the survey 

period were reported in the South (68) 

and West (61), while the Midwest (54] 

and the Northeast (54) were some 

what weaker. 

Housing markets continue to 

rebound, with the national index at 69 

in January. Nationwide, 47 percent of 

respondents said housing market con 

ditions improved in their local areas 

during the three previous months, 

with only 11 percent reporting worse 

conditions. These signs of improved 

housing conditions appeared in all 

regions of the nation. Two-thirds of 

the respondents in January still said 

chat excess supply existed in their 

local housing markets—virtually un 

changed since April 1991. These per 

centages ranged regionally from 39 

percent (Midwest) to 90 percent 

(Northeast). 

Few respondents reported im 

provements in commercial real-estate 

markets. The national index stood at 

46 in January. Sixty-two percent of 

respondents reported no change, 

while 21 percent reported deteriora 

tion and 17 percent noted gains in 

activity. Negative reports in this sec 

tor outweighed positive ones in all 

regions except the South. All regions 

are suffering from commercial over 

building, with the proportion of 

respondents reporting oversupply 

ranging from 69 perceni in the Mid
FDIG Banking Review 

west to 96 percent in the Northeast. 

Survey of Real Estate Trends, FDIC, January 

1992. 

Resolution Trust Corporation 

and Thrift Depositor 

Protection Oversight Board 

Resolution Trust Corporation 

Refinancing, Restructuring, 

and Improvement Act of 

1991 

The President signed legislation 

on December 12,1991, which, among 

many other provisions, removed the 

FDIC as manager of the RTC, to be 

replaced in that capacity by the Chief 

Executive Officer of the RTC. The 

Board of Directors of the RTC was 

abolished. The FDIC's Board of 

Directors had served as the Board of 

the RTC. 

The legislation redesignated the 

RTC Oversight Board (OB) as the 

Thrift Depositor Protection Over 

sight Board (TDPOB), and expanded 

its membership from five to seven. 

The Secretary of Housing and Urban 

Development was removed from 

membership, and the Chairman of the 

Board of Directors of the FDIC, the 

Director of OTS, and the Chief Ex 

ecutive Officer of the RTC were 

added. 

Establishing Prices in Auction 

Sales 

The RTC in February 1992 

ratified an earlier statement of policy 

that allows the agency to sell proper 

ties absolute at auctions if the proper 

ty has an established market value 

less than $100,000 and if the property 

has been widely exposed to the 

market. All other properties may be 

sold at auctions with reserve prices as 

specified. While the policy for estab 

lishing prices applies generally to 

properties sold by auction, the pricing 

flexibility allowed under the general 

policy on the sale of real estate may be 

used for auctions if necessary to set 

appropriate reserve prices below the 

minimum reserve prices allowed 

under the auction pricing policy. 

Thus, for auctions, the pricing policy 

that yields the greatest flexibility may 

be Used. FR, 2/20/92, p. 6143; 3/16, 

p.9I55. 

Policy on Offering Portfolios 

ofAssets for Sale 

The RTC will negotiate sales of 

$100 million or more of hard-to-sell 

assets under either of the following 

conditions: 1) The specific asset pool, 

or criteria for identifying an asset pool, 

has been advertised and proposals 

have been widely solicited; 2) the 

present-value sales price exceeds the 

sum of the minimum acceptable sale 

prices for the individual assets. The 

policy is being re-published to in 

clude the comments submitted by the 

OB. 

The RTC, through the National 

Sales Center, will publicly solicit, 

evaluate and competitively select 

purchase offers for portfolios of 

qualified assets on a pilot basis. 

Under this pilot program, total sales of 

up to $8.0 billion (net present value of 

expected proceeds) are authorized. 

The assets (either specific assets or 

classes of assets) to be included in 

these portfolios will be identified in 

advance, by either the RTC or the 

buyer. RTC financing may be offered 

to qualified purchasers of these 

portfolios. The RTC will reserve a 

position to share in any upside asset 

appreciation upon sale or refinancing 

where appropriate. In all cases, the 

RTC will employ competitive proce 

dures designed to provide fair and 

consistent treatment of all offerors 

and maximize the present-value 

returns from the transactions. To en 

sure that the process is fully open to 

scrutiny, the RTC will disclose to the 

public the details of all completed 

transactions on a timely basis. FR, 

11129/91, p. 61065. 

Operations Update 

In February 1992, the amount of 

assets under RTC management, in 

cluding both conservatorships and 

receiverships, dropped from $128 bil 

lion to $123 billion, and over the last 

eight months RTC-managed assets 

have decreased by $45 billion. 

The $123 billion of assets under 

RTC management consisted of: $16 

billion in cash and securities, $21 bil 

lion in performing 1-4 family 

mortgages, $26 billion in other per 

forming loans, $28 billion in delin 

quent loans, $15 billion in real estate, 

$7 billion in investments in sub 

sidiaries, and $10 billion in other 

assets. 

Conservatorships, of which there 

were 84 at the end of February, held 

$44 billion in gross assets. Of the total, 

cash and securities (including a sub 

stantial amount pledged as collateral 

against borrowings) represented 25 

percent; performing 1-4 family 

mortgages, 20 percent; other perform 

ing loans, 21 percent; delinquent 

loans, 13 percent; real estate, 11 per 

cent; investments in subsidiaries, 3 

percent; and other assets, 6 percent. 

The 602 receiverships held $79 bil 

lion in assets on February 29, exclud 

ing approximately $10 billion in assets 

accumulated from receivership col 

lections. Because many of the rela 

tively marketable assets have been 

sold before an institution enters a 

receivership, most of the assets 

retained by the RTC in receivership 

consisted of lower-quality, lessmarketable assets. Thus, real estate 

and delinquent loans represented 41 

percent of receivership assets, while 

cash, securities, and performing 1-4 

family mortgages represented only 22 

percent. A substantial amount of the 

securities and performing mortgages 

in receivership were junk bonds or 

pledged for secured borrowings or 

substandard loans. 

Thrift closings have totaled 602 

from the establishment of the RTC in 

August 1989 through February 1992. 

These thrifts held $186 billion in as 

sets ac the time of closure. Of the 

total, $41 billion of assets, or 22 per 

cent, were sold to acquirers (after 

taking into account assets returned 

thus far to the RTC under putback 

provisions of resolution transactions). 

42 
Recent Developments 

Additional assets may be returned to 

the RTC in future months. 

Estimated resolution costs for the 

602 closed thrifts amounted to $78.3 

billion, 36 percent of their total 

liabilities at the time of resolution. If 

the insured deposits of all 602 institu 

tions had been paid out to depositors, 

the estimated resolution would have 

been $80.9 billion. 

Sales and principal collections 

since the RTC's inception through 

February totaled $242 billion, net of 

putbacks to date. The RTC collected 

$79 billion through conservatorship 

sales, $63 billion in other conservatorship collections, $41 billion in resolu 

tion sales (net of putbacks), and $58 

billion in receivership sales and prin 

cipal collections. 

The amounts collected included 

$107 billion from securities, $70 bil 

lion from 1-4 family mortgages, $27 

billion from other mortgages, $20 bil 

lion from nonmortgage loans, $8 bil 

lion from real estate, and $10 billion 

from Other assets. RTC Review, RTC, April 

1992. 

S&Ls' Losses on Government 

Securities Trading 

The RTC provided information to 

a Congressional subcommittee updat 

ing previously submitted data regard 

ing government securities activities 

by savings and loan associations that 

have come under the jurisdiction of 

the agency. 

Since the previous report in MayJune 1991, the RTC surveyed 632 as 

sociations under its control for 

securities activity and potential 

claims. The purpose was to identify 

patterns and practices that might lead 

to claims against brokers and invest 

ment advisors. 

Findings of the analysis include: a) 

approximately 50 associations have 

reflected large losses associated with 

U.S. Treasury instruments, and 19 of 

them were engaged in trading with 

broker/dealers that are no longer in 

business; b) 26 associations reported 

significant losses from derivative 

products used for hedging purposes or 

specu lation; c) 39 associations had sig 

nificant losses on futures operations 

related to interest-rate risk manage 

ment operations; d) 28 showed losses 

as a result of the use of options for 

hedging interest-rate risk; and e) 95 

reported losses arising from 

mortgage-backed securities (both 

government and commercially pack 

aged). These losses appear to have 

resulted from interest-rate move 

ments and prepayment risk. Staff'Report, 

RTC, 316192. 

Affordable Housing Program 

The RTC completed the largest 

sale to date under its Affordable 

Housing Disposition Program, with 

the acquisition of 26 multifamily 

properties, located primarily in Texas, 

for approximately $75 million by an 

affiliate of General Electric Capital 

Corporation. 

In the transaction, 1,956 of the 

5,590 units purchased will be made 

available for between 40 to 50 years 

for low-income households with 

limits on rents. The program confines 

sales of multifamily housing projects 

to buyers willing to maintain 

restricted rents on at least 35 percent 

of the units. Rents are controlled 

through deed restrictions, which are 

enforced for at least 40 years. The 

RTC adjusts the price of the property 

to reflect the restricted income flow 

and investment value resulting from 

these deed restrictions. 

The RTC is currently marketing 

approximately 50 multifamily proper 

ties with more than 4,000 units 

through the affordable housing pro 

gram. The program has resulted in 

sales of over 13,000 residences to lowand mode rate-income households. 

PR-491-91, RTC, 11125/91. 

The RTC adopted a new rule 

aimed at bolstering and improving its 

Affordable Housing Disposition Pro 

gram. The rule enables non-profit 

groups and public agencies to 

negotiate directly with the RTC on 

affordable housing properties outside 

of the traditional clearinghouse 

process. The rule also expands upon 

the RTC's policies on giving 

preference to certain bidders on mul 

tifamily properties. In evaluating sub 

stantially similar offers, the RTC now 

will impute additional value and as 

sign it to a potential purchaser who 

reserves the highest percentage of 

units for occupancy by lower-income 

families. In considering comparable 

offers on single-family houses, 

preference will continue being given 

to lower-income bidders. 

The new rule also provides for, 

among other things, the sale of singlefamily affordable housing properties 

in conservatorship; also, intensified 

marketing of single-family affordable 

homes to families with members who 

are lower-income veterans. 

The interim final rule takes effect 

upon publication in the Federal 

Register, following which a 60-day 

comment period is provided. News 

Release, TC, 3/24/92; FR, 516, p. 19500. 

Contracting Goals for 

Minority- and WomenOwned Businesses 

The RTC has established new 

goals under its Minority and Women 

Outreach and Contracting Program, 

wherein all RTC offices, except the 

Division of Legal Services (DLS), 

will be expected to allocate a mini 

mum of 30 percent of their contracts 

and fees to minority- and womenowned businesses. DLS is expected 

to allocate 20 percent of its budgeted 

fees for new assignments to minorityand women-owned law firms, and ten 

percent of new-assignment fees to 

minorities and women in nonminority or non-women-owned law 

firms. All lead contractors with es 

timated or actual fees of $200,000 or 

more, including those using legal ser 

vices, will be required to subcontract 

at least 25 percent of substantive work 

and commensurate fees to minorityand women-owned businesses and 20 

percent to minority- and womenowned legal firms. 

Since the RTC's creation in 

August 1989, 87,206 contractors have 

43 
FDIC Banking Review 

registered, of which 12.4 percent 

(10,892) are minority-owned firms, 

and 18.8 percent (16,458) are womenowned firms. As of February 1992, the 

RTC has awarded 60,226 contracts 

with fees totaling $1.73 billion. 

Minority-owned firms received 8.6 

percent of the contracts, and 9.5 per 

cent of the fees, while the figures for 

women-owned firms were 20.9 per 

cent and 17.7 percent, respectively. 

The RTC's new goals require that 

performance evaluations for contrac 

tors include their successes in meet 

ing goals under the Program. Under 

the new guidelines, the Program will 

intensify its outreach and evaluation 

efforts in areas that have historically 

been underrepresented by minorityand women-owned businesses. News 

Release, RTC, 3113192. 

Government Is Liable for 

S&Ls' Loss Under Rule 

Change 

A U.S. claims court judge, in a case 

involving the supervisory treatment 

of goodwill prior to FIRREA, ruled 

that the government may repudiate 

its contract terms relating to account 

ing for goodwill, but said that S&Ls 

should be compensated for the loss 

from the required change in account 

ing. Reportedly, numerous such cases 

are pending, and the ruling could 

have far-reaching implications with 

respect to thrift resolutions. 

In the 1980s, thrift regulators in 

contracts with buyers of failing 

savings institutions permitted them to 

count the negative net worth of the 

failing institution as goodwill, and in 

clude such goodwill in the buyer's net 

worth. This regulatory policy was 

prohibited by FIRREA. WSJ. 2125/92, 

p.A2. 

Agency Plans Downsizing 

Albert V. Casey, President and 

Chief Executive Officer of the RTC, 

has approved a plan for further 

streamlining and beginning the 

phase-down of the agency's opera 

tions. Regional offices in Atlanta, Dal 

las, Denver, and Kansas City will be 

phased out by June of this year, and 

their operations will be merged into 

RTC consolidated offices in the same 

cities. Existing consolidated offices in 

Phoenix, Tampa, Baton Rouge, Min 

neapolis, Tulsa, and San Antonio are 

expected to be closed by January 31, 

1993. Offices in Chicago, Houston, 

and Somerset (N.J.) are expected to 

be closed by September 30,1993. 

The planned downsizing will 

achieve a reduction of approximately 

50 percent in the number of 

employees in the field by September 

30, 1993, leaving a staff of less than 

4,000. While most of these employees 

are temporary contract hires, per 

manent employees are beginning the 

transition back to the FDIC. Ap 

proximately 400 to 500 permanent 

employees in the field will return to 

the FDIC starting in July 1992, and by 

year-end their reassignments will be 

completed. News Release, RTC, 3123192. 

Federal Reserve Board 

Capital Guidelines 

The FRB proposed to revise its 

capital-adequacy guidelines for bank 

holding companies and state member 

banks to provide explicit guidance on 

the types of intangible assets that may 

be included in (not deducted from) 

the Tier 1 capital calculation for riskbased and leverage capital purposes. 

The proposal is consistent with inter 

national capital standards. It was 

developed in conjunction with the 

staffs of the four federal financial in 

stitutions regulatory agencies, and is 

aimed at achieving greater consisten 

cy with respect to the capital treat 

ment of intangible assets. In addition, 

certain aspects of the proposal are in 

tended to implement provisions of 

FDICIA. 

Under the proposal, purchased 

mortgage servicing rights (PMSRs) 

and purchased credit-card relation 

ships (PCCRs) would be includable in 

the Tier 1 capital computation, if in 

the aggregate they do not exceed a 

limit of 50 percent of Tier 1 capital 

and PCCRs do not exceed a sublimit 

of 25 percent of Tier 1 capital. 

PMSRs and PCCRs in excess of these 

limits, as well as core deposit intan 

gibles and all other intangible assets, 

would be deducted from the sum of 

the core capital elements in determin 

ing Tier 1 capital. Press Release, FRB, 

2119192; FR, 2/26, p. 6563. 

The FRB amended its risk-based 

and leverage capital guidelines, effec 

tive January 17, 1992, to remove the 

limit on the amount of noncumulative 

perpetual preferred stock bank hold 

ing companies may include in Tier 1 

capital. Cumulative perpetual 

preferred stock will continue to be 

included in Tier 1 capital for bank 

holding companies, up to a limit of 25 

percent of Tier 1 capital. This change 

to the guidelines will afford banking 

organizations greater flexibility in 

raising capital. Press Release, FRB, 1/14/92; 

FR, 1/17, p. 2010. 

The FRB requested comment on 

proposed modifications to its riskbased capital guidelines that would 

lower the risk weight from 100 per 

cent to 50 percent for multifamily 

housing loans meeting certain criteria. 

This change was directed by a 

provision of the RTC Refunding Act 

of 1991. Also proposed is reducing 

the risk weight from 20 percent to 

zero for certain transactions collateral

ized by cash and OECD central 

government securities, including U.S. 

Government agency securities, if the 

transactions meet specified criteria. 

This change would put U.S. banking 

organizations on a more equal basis 

with foreign banks regarding the capi 

tal treatment of such transactions. Press 

Release, FRB, 4/10/92; FR, 4/20, p. 14362. 

Foreign-Bank Supervision 

The FRB issued an interim regula 

tion, amending its Regulation K, to 

carry out provisions of the Foreign 

Bank Supervision Enhancement Act 

of 1991. The Act stemmed from a 

recommendation by the FRB last year 

during its investigation of the Bank of 

Credit and Commerce International. 

The interim regulation is effective 

44 
Recent Developments 

immediately, with a 60-day comment 

period. 

The law requires that a foreign 

bank applying to operate in the U.S. 

must be subject to comprehensive su 

pervision or regulation by its home 

country authorities on a consolidated 

basis. The Ace also contains discre 

tionary standards to be considered by 

the FRB in deciding on applications, 

and these are set forth in the regula 

tion. The bank must supply any infor 

mation to the FRB that is needed to 

assess the application adequately. 

In making a determination on con 

solidated home country supervision, 

the FRB will assess, among other fac 

tors, the extent to which the home 

country supervisor: a) ensures that the 

foreign bank has adequate procedures 

for monitoring and controlling its 

worldwide operations; b) receives in

fotmation on the condition of the 

foreign bank outside its home 

country, whether through examina 

tion, audit reports or otherwise; c) ob 

tains information on the dealings and 

the relationship between the foreign 

bank and its affiliates; d) obtains 

financial reports that permit analysis 

of the condition of the foreign bank on 

a consolidated basis; and e) evaluates 

prudential standards, such as capital 

adequacy, on a worldwide basis. 

The interim regulation also details 

the procedures to be used in the filing 

of applications by foreign banks to 

operate in this country, and addresses 

other matters, in part including ter 

mination of offices of a foreign bank, 

examination of offices and affiliates of 

foreign banks, and the limitation on 

loans to One borrower. Press Release, FRB, 

4/8/92; FR, 4/lS,p. 12992. 

The FRB amended its Regulation 

Y, implementing the FBSEAof 1991, 

to require that foreign banking or 

ganizations acquiring more than five 

percent of the shares of a U.S. bank or 

bank holding company file an applica 

tion with the FRB under the Bank 

Holding Company Act. The interim 

rule is effective April 15, 1992. FR. 

4/'15/92, p. 12992. 

Review of Bank Holding 

Company Applications 

The FRB issued an interim rule, 

amending its Regulation Y, to imple 

ment requirements of FDICIA. The 

FRB is required to disapprove any 

application under Section 3 of the 

Bank Holding Company Act if: a) the 

company fails to assure the FRB that 

the company will make available such 

information on the operations or ac 

tivities of the company, or any of its 

affiliates, as the FRB determines to be 

appropriate to enforce compliance; b] 

in the case of an application involving 

a foreign bank, the foreign bank is not 

subject to comprehensive supervision 

or regulation on a consolidated basis 

by the appropriate authorities in the 

bank's home country. FDICIA also 

provides that the FRB's consideration 

of the managerial resources of a com 

pany or bank shall include considera 

tion of the competence, experience, 

and integrity of the officers, directors, 

and principal shareholders of the com 

pany or bank. Press Release, FRB, 4/8/92; FR, 

4115, p. 13002. 

Relocation of Subsidiary 

Bank to Another State 

The FRB rescinded its policy re 

quiring applications for relocations of 

a subsidiary bank to another state, ef 

fective March 23, 1992. Accordingly, 

the FRB will not require the filing of 

an application for its approval under 

the Bank Holding Company Act for 

bank relocations except in situations 

in which the FRB has found an 

evasion of the BHC Act. FR, 3/23/92,p. 

9973. 

While the National Bank Act per 

mits relocations within 30 miles with 

the approval of the OCC, the FRB 

had taken the position that such a 

relocation to an adjoining state was in 

effect an "acquisition" of a bank, and 

thus its approval was required under 

the BHC Act. The FRB's position 

was rejected in a decision of a D.C. 

circuit court of appeals in December. 

Legal and Regulatory Update, N. Y. Slate Bankers 

Association, 3113192, p. 2. 

Securities Activities 

The FRB revised its policy on 

banking institutions' securities ac 

tivities, effective February 10, 1992. 

The policy was developed under the 

auspices of the FFIEC. The policy 

statement recommends procedures to 

be used in the selection of a securities 

dealer. It discusses the need to docu 

ment and implement prudent policies 

and strategies for securities that are 

held for investment, trading or sale, 

and to establish effective internal con 

trols. Certain securities trading and 

sales practices are viewed as being 

unsuitable when conducted in an in 

vestment portfolio. 

The substance of secutities ac 

tivities determines whether securities 

reported as investments are, in reality, 

held for trading or for sale. Securities 

held for trading must be reported at 

market value and securities held for 

sale must be reported at the lower of 

cost or market value. 

The policy encompasses high-risk 

mortgage securities that are not 

suitable investment portfolio hold 

ings. These securities may only be 

acquired to reduce an institution's in 

terest-rate risk and must be reported 

in the trading account at market 

value, or as assets held for sale at the 

lower of cost or market value. Ex 

aminers may seek the orderly divesti 

ture of high-risk mortgage securities 

that do not reduce interest-rate risk. 

The statement also addresses exces 

sive holdings of long-term zerocoupon bonds that are considered an 

imprudent investment practice. Such 

holdings will be subject to criticism by 

examiners who may seek their orderly 

disposal. Press Release, FRB, 1/10/92. 

Loans to Bank Officials 

The FRB proposed to revise its 

Regulations O and Y to conform to 

Section 22(h) of the Federal Reserve 

Act as amended by Section 306 of 

FDICIA. In general, Section 22(h): 

a) requires a bank's board of directors' 

approval before any extension of 

credit can be made to an insider or a 

related interest in excess of a 

45 
FDIC Banking Review 

threshold amount; b) prohibits any 

extension of credit to an insider or a 

related interest on preferential terms; 

c) limits the amount a bank may lend 

co each of its executive officers and 

principal shareholders and their re 

lated interests; and d) prohibits over 

drafts to executive officers and 

directors (but not to principal 

shareholders). 

Section 306, in part: a) requires 

that, when lending to an insider, a 

bank follow credit underwriting pro 

cedures that are "not less stringent 

than those applicable to comparable 

transactions by the bank with persons 

outside the bank; b) subjects directors 

to the same aggregate lending limit 

currently applicable to executive of 

ficers and principal shareholders; c) 

creates a new limitation on the total 

amount a bank may lend in the ag 

gregate to its insiders, which in 

general is equal to the bank's unim 

paired capital and surplus; and d) 

tightens the definition of principal 

shareholder for banks located in small 

communities, making applicable an 

existing ten percent definition to all 

banks, regardless of the size of the 

community where the bank is located. 

Press Release, FRB, 2/13/92; FR, 2120,p. 6077. 

FRB Approves Large-Bank 

Mergers 

The FRB approved the merger of 

Chemical Banking Corp. and 

Manufacturers Hanover Trust Corp., 

that would create the nation's third 

largest banking organization, with 

$135.4 billion in assets. The institu 

tion, to be called Chemical Bank, will 

meet certain terms, including main 

taining branches in low-income 

neighborhoods. Fourteen of 91 

branches located in low- and 

moderate-income neighborhoods in 

the New York City area will be closed; 

however, the number of teller 

employees and automated teller 

machines will be increased in those 

neighborhoods. Chemical also will 

provide $750 million over five years 

for housing and community develop 

ment loans in low- and moderate-in 

come communities in New York, 

New Jersey and Texas. 

The merger of NCNB Corp. and 

C&S/Sovran will create a $118.2 bil 

lion banking institution, called 

NationsBank, fourth largest in the 

U.S. in terms of assets. The FRB 

noted acceptable CRA ratings by the 

institutions, and CRA-related initia 

tives and commitments, among them 

a ten-year, $10-billion commitment to 

community development lending. As 

in the Chemical case, the FRB em 

phasized capital adequacy, saying 

bank organizations having expansion 

proposals are expected to maintain 

strong capital substantially above the 

minimum levels set forth in the 

agency's risk-based capital guide 

lines. While NCNB and C&S/Sovran 

compete directly in 33 banking 

markets in five states, the FRB said 

there were antitrust problems in only 

five markets in South Carolina. The 

banks agreed to divest several 

branches in four of those markets. In 

the fifth market, the merger would 

result in higher-than-normal con 

centration, but the FRB noted as off 

setting factors the vigorous in-market 

competition, full competition from 

thrift institutions, and the attractive 

ness of that market for new entrants. 

BBR, 1219, p. 921; 121J61, p. IOI3;WSJ, 12/2, p. 

AN. 

The FRB granted approval for the 

merger of BankAmerica Corp. and 

Security Pacific Corp, as a result of 

which BankAmerica would be the 

second largest banking organization 

in the U.S., with $191.9 billion in as 

sets. In the transaction, BankAmerica 

is required to divest branch buildings, 

deposits and small-business and con 

sumer loans in 116 Western markets 

where the two banks had competed. 

The largest divestiture in a state 

would occur in Washington, involving 

87 branches and $3.3 billion in 

deposits, about half of which are in 

Seattle. The approval also is contin 

gent upon BankAmerica improving 

its record of lending to low-income 

neighborhoods. Another contingency 

involved BankAmerica's projected 

level of capital following the merger. 

WSJ,3124/92, p. A3. 

Bane One Plans Acquisition 

of Valley National 

Bane One Corp. has agreed to the 

purchase of Valley National Corp., 

Phoenix, a deal that would increase 

Bane One's assets to $71.7 billion, 

making it the eighth largest U.S. 

banking firm. When pending transac 

tions are completed, almost half of the 

Ohio-based holding company's assets 

would be in Arizona, Colorado, Texas 

and Utah, ab, 4/15/92,p. J. 

Court Allows Citicorp to Sell 

Insurance 

The U.S. Supreme Court declined 

to hear an appeal by the insurance 

industry of a federal appeals court 

decision overturning an order by the 

FRB that barred Citicorp from 

marketing insurance under a 

Delaware law. The state's law, 

enacted in 1990, permits banks to un 

derwrite and sell life, health, and 

other insurance products nationwide 

through subsidiaries chartered in the 

state. FDICIA generally prohibits 

state bank units from underwriting 

most insurance, but provides for cer 

tain exceptions for bank holding com 

panies that were authorized to write 

insurance as of November 21, 1991. 

The 1991 law, however, does not 

prohibit state-chartered banks from 

selling insurance nationwide. AB, 

W4f92,p.I;WSJ,tfI4. 

Home-Equity Lending 

Disclosure Rules 

The FRB requested public com 

ment on whether to revise its Regula 

tion Z (Truth in Lending) dealing 

with disclosure of any discounted ini 

tial rate, and payment examples, for 

home-equity lines of credit. The rules 

relate to the Home Equity Loan Con 

sumer Protection Act of 1988, which 

requires creditors to provide con 

sumers with information for open-end 

credit plans secured by the 

consumer's dwelling. Regulation Z 

does not require the stating of the 

46 
Recenc Developments 

discounted rate in the preprinted 

early disclosures; however, it requires 

disclosure of related aspects of "teaser 

rates," including that the initial rate is 

discounted and the time period the 

rate would be in effect. The second 

issue involves the statutory require 

ment for disclosure of three types of 

home-equity loan payments, and the 

disclosure of representative examples 

of the various payment options under 

Regulation Z. 

The approach adopted by the FRB 

for disclosure of the discounted initial 

rate, and certain payment examples, 

was examined by a U.S. court of ap 

peals, and remanded to the FRB for 

further consideration. FR, 12)30191, p. 

67233; ABA Bankers Weekly, 1/7/92, p. 6. 

Home Mortgage Disclosure 

The FRB published revisions to its 

Regulation G, requiring financial in 

stitutions to begin using 1990 census 

tract numbers to identify and report 

property locations, beginning on 

January 1, 1992. The regulation, 

which implements KMDA, requires 

depository and nondepository finan 

cial institutions that have over $10 

million in assets and have offices in 

metropolitan statistical areas (MSAs) 

to disclose annually their originations 

and purchases of mortgage and home 

improvement loans, as well as applica 

tions they have received for such 

loans. FR, 11126191,p. 59853. 

Commodities Activities 

Requiring FRB Approval 

The FRB issued an interpretation 

of its Regulation H that states that 

engaging in certain activities relating 

to commodities, including com 

modity- or equity-linked activities 

such as commodity or stock-index 

swaps, will be considered to be a 

change in the general character of 

a bank's business, and state member 

banks must obtain the FRB's ap 

proval to engage in such activities. 

Under Regulation K, this approval re 

quirement also will apply to certain 

commodity swap activities when 

undertaken outside of the United 

States by U.S. banking organizations, 

effective December 4, 1991. FR, 

12I4J91, p. 63406. 

Community Reinvestment Act 

Examination Ratings 

The FRB will publish its CRA ex 

amination ratings of state member 

banks on a weekly basis, as recom 

mended by the FFIEC. The publish 

ed information will contain the names 

of the institutions, their city-state ad 

dresses, and the date ofeach examina 

tion. A cumulative list of all CRA 

examinations of state member banks 

conducted since July 1, 1990 is being 

made available. Press Release, FRB, 

12/10/91. 

Truth in Savings 

The FRB issued a proposal for a 

regulation to implement the TIS Act. 

Under the Act, depository institutions 

are required to disclose fees, interest 

rates and other terms concerning 

deposit accounts to consumers before 

they open accounts, and to provide 

periodic statements to consumers to 

include information about fees im 

posed, interest earned and the annual 

percentage yield, on those state 

ments. The institutions are subject to 

substantive limitations on the 

methods by which they determine the 

balance on which interest is calcu 

lated. The law also includes rules 

dealing with advertisements for 

deposit aCCOUntS. FR, 4/13/92,p. 12735. 

Availability ofFunds 

The FRB adopted changes on an 

interim basis to its Regulation CC to 

conform to amendments to the Ex 

pedited Funds Availability Act con 

tained in FDICIA. The amendments 

allow banks to extend holds, on an 

exception basis, to "next day" and 

"second-day" availability checks, and 

allow one-time notices of certain ex 

ception holds. Comments were re 

quested. 

The FRB's regulation establishes 

availability schedules to limit the 

holds banks can place on deposits to 

transaction accounts and requires 

banks to disclose their funds 

availability policy to their customers. 

Nonlocal checks must generally be 

made available for withdrawal on the 

fifth business day after deposit, local 

checks on the second business day, 

and certain "low-risk" checks, such as 

government, cashier's, certified, and 

teller's checks, on the next business 

day. Under the exceptions, the 

depository bank can extend the hold 

for a reasonable period of time. 

Among the categories to which the 

exception holds apply are deposits to 

new accounts, daily aggregate 

deposits in excess of $5,000, and 

checks deposited to an account that 

has been repeatedly overdrawn. FR, 

! 129/92, p. 3277. 

Report on the Terms of 

Credit-Card Plans 

The FRB announced the 

availability of a report which the 

Federal Reserve System collects and 

publishes every six months on the 

terms of credit-card plans offered by 

financial institutions. The two-part 

report includes such credit informa 

tion as the annual percentage rate 

(APR), annual fee and length of any 

grace period, applicable to each 

creditor's largest credit-card plan. To 

further assist the consumer in shop 

ping for the best terms, the report 

indicates whether the credit-card plan 

is available throughout the country or 

only in certain states. The report in 

cludes a telephone number that may 

be used to contact the creditor to ob 

tain an application. Press Release, FRB, 

3/16192; Statistical Release, 3116. 

Office ofthe Comptroller of the 

Currency 

Court Denies Banks' Right to 

Sell Insurance 

The U.S. Court of Appeals for the 

District of Columbia ruled that na 

tional banks do not have the right to 

sell insurance from small towns. 

While federal law generally prohibits 

banks from selling most types of insur 

ance, a 1916 law authorized banks to sell 

insurance in towns with populations 

47 
FDIC Banking Review 

of 5,000 or less. The Appeals Court 

ruled that legislation enacted in 1918 

repealed the insurance power granted 

two years earlier. 

Traditionally it has been accepted 

that in passing the 1916 legislation it 

was Congress' intention to facilitate 

the marketing of insurance in the 

smaller localities where it otherwise 

might often not be readily available. 

In 1986, the OCC ruled chat national 

banks in towns of 5,000 could sell 

insurance nationwide. WSJ, 2110192, 

p. A3. 

The Eastern District Court of Ken 

tucky has decided not to accept auto 

matically the D.C. Appeals Court 

decision, and will rule on whether the 

law allowing national banks to offer 

insurance in small towns continues to 

exist. The case in Kentucky involves 

the refusal by Kentucky's Insurance 

Commissioner to provide licenses to 

three national banks located in towns 

with populations of 5,000 or less. ABA 

Bankers Weekly, 313192, p. 4. 

Holding Company Subsidiary 

Can Offer Free Insurance 

The OCC said subsidiaries of an 

Atlanta-based bank holding company 

may offer their customers free ac

cidental-death-and-dismemberment 

insurance. Coverage of $1,000 that is 

underwritten by an insurance com 

pany would be provided by the bank, 

which would also make the insurer's 

brochures available to customers, 

supply customer lists to the insurer, 

and provide billing services for the 

collection of premiums. The bank 

would receive a fee from the insurer 

for services rendered, but would not 

receive a commission based on the 

number of policies provided to cus 

tomers. Interpretive Letter No. 566, OCC, 

1212191; ABA Bankers Weekly, 1/28/92, p. 3. 

Banks' Authority to Offer 

Annuities Upheld 

A U.S. district court in Texas, in a 

case brought by the Variable Annuity 

Life Insurance Co., supported the 

OCC's determination that the sale of 

annuities is "within the power of na 

tional banks to broker financial-in 

vestment instruments." The OCC 

had approved an annuity program of a 

subsidiary of the North Carolina Na 

tional Bank, Charlotte, ruling that an 

nuities are primarily financialinvestment instruments, because 

they lack the basic insurance charac 

teristics of indemnification against 

risk of loss. The court said that Con 

gress had not specifically addressed 

annuities, and the regulatory agency's 

opinion is controlling "unless it is ar 

bitrary, capricious, an abuse of discre 

tion or otherwise not in accordance 

With ]SLW."ABA Banters Weekly, 12/10/91, p. 1. 

Capital Guidelines for 

Certain Residential Loans 

The OCC proposed to amend its 

risk-based capital guidelines, im 

plementing a section of the Resolu 

tion Trust Corporation Refinancing, 

Restructuring, and Improvement Act 

of 1991, to include in the 50 percent 

risk-weight category certain loans to 

builders to finance the construction of 

presold, 1-4 family residential proper 

ties. These loans are currently 

weighted 100 percent. FR, 4/9/92, p. 

12218. 

Capital Treatment of 

Intangible Assets 

The OCC proposed to amend its 

minimum capital ratio (leverage ratio) 

and risk-based capital guidelines 

for the treatment of intangible assets 

held by national banks. The pro 

posed changes would bring greater 

consistency in the capital rules of the 

OCC, FDIC, FRB, and OTS. These 

changes are expected to increase the 

total amount of purchased mortgage 

servicing rights and purchased creditcard relationships that a national bank 

may include in its regulatory capital. 

FR, 4/9/92, p. 12214. 

Office of Thrift Supervision 

Early Resolution!Assisted 

Mergers 

With the OTS' programs for con

servatorship and accelerated resolu 

tion (ARP) in place and dealing with 

a dwindling number of Group IV 

thrifts, the agency is now turning at 

tention to the resolution of those 

Group III thrifts that are considered 

most vulnerable. Several Group III 

institutions, those considered by OTS 

to be troubled, have large problemasset portfolios. Some will be unable 

to meet their fully phased-in capital 

requirements without government as 

sistance, 

Under a concept program called 

"Early Resolution/Assisted Mergers" 

(ER/AM), the government would 

enter the resolution picture even ear 

lier than with ARP. The objective is 

to facilitate a merger with a healthy 

acquirer while the institutions may 

still be solvent and even profitable. 

The earlier a troubled institution can 

be resolved, the less its condition will 

deteriorate, and thus it will lower the 

ultimate cost to the taxpayer, 

ER/AM is a voluntary process for 

troubled institutions seeking 

recapitalization. Institutions would 

work with potential acquirers to for 

mulate a transaction structure that 

would be acceptable to all stock 

holders, including the government. 

To ensure an open and competitive 

process, the FDIC then would market 

the institution, using the agreed upon 

structure and RTC and FDIC proce 

dures and standards. 

Funding for ER/AM would come 

from the SAIF, which currently has no 

available liquid assets and would have 

to be given the resources for this pur 

pose. Unlike ARP resolutions, 

shareholders are not necessarily 

wiped out by early resolution, al 

though their stock holdings would be 

diluted. They, as well as debt holders, 

would be expected to make substan 

tial concessions in order to effect the 

acquisition. 

OTS states that early resolution as 

a process gained the backing of Con 

gress which included in 1991 banking 

legislation a Sense of the Congress 

statement fully supporting and en 

couraging early resolution as the 

RTC, FDIC and OTS have en 

visioned it. NEWS, OTS, 12/11/91. 

48 
Recent Developments 

Minimum Standards for 

Unassisted Transactions 

The OTS set forth minimum capi 

tal standards for significant voluntary 

transactions for federally insured 

savings associations, including ac

quisitionsofcontrol, mergers, mutualto-stock conversions, and branch 

purchases, that do not require govern 

ment financial assistance. The is 

suance does not apply to simple 

holding company reorganizations. 

The principal difference from ear 

lier policy is that proposals and 

applications to consummate a sig 

nificant transaction are no longer re 

quired to demonstrate that the 

acquired or resulting association will 

meet the fully phased-in capital re 

quirements upon consummation of 

the transaction, but rather the cur 

rently applicable minimum capital re 

quirements. An acquired or resulting 

association that meets only the cur 

rent minimum capital requirements 

must submit a business plan that 

describes how the association will 

achieve compliance with the fully 

phased-in capital requirements by 

January 1, 1995. Thrift Bulletin 38-30,07$, 

11119191. 

Branching by Federal Savings 

Associations 

Amending its rule, effective May 

11, 1992, the OTS deleted current 

regulatory restrictions on the branch 

ing authority of federal savings as 

sociations to permit nationwide 

branching to the extent allowed by 

federal statute. The amendment is in 

tended to facilitate consolidation and 

geographic diversification among 

federal savings associations, and 

thereby foster safety and soundness, 

and to improve the quality of services 

available to customers. 

Section 5(r) of the Home Owners' 

Loan Act (HOLA), applicable to 

federal savings associations since 

enactment of the Garn-St Germain 

Act of 1982, permits a federal savings 

association to branch outside of its 

home state if the association meets 

certain tests of the Internal Revenue 

Code for tax purposes. Through the 

HOLA, the OTS states, the Congress 

has given the OTS and its predeces 

sor, the Federal Home Loan Bank 

Board, exceptionally broad authority 

to regulate the branching operations 

and other activities of federal thrifts. 

On numerous occasions the courts 

have confirmed that the OTS's 

authority in this respect is plenary and 

not bounded by any restrictions of 

state law. Pursuant to this authority, 

therefore, federal savings associations 

may be allowed to branch on an inter 

state basis. Since 1981, amendments 

to the branchingpolicy gradually have 

expanded the branching authority of 

federal thrifts in recognition of the 

emerging national market for 

depository institution consumer ser 

vices and to encourage the acquisition 

of failing associations. FR, 12130/91, p. 

67236; 419/92,p. 12203;NEWS, OTS, 4/2. 

Supervisory Conversions 

The OTS proposed to amend its 

regulations to expand the number of 

capital-deficient mutual savings as 

sociations eligible to undertake 

voluntary supervisory mutual-to

stock conversions. The proposal 

would permit voluntary supervisory 

conversions, which allow the sale of 

stock to a limited number of investors, if 

associations fail to meet any of their cur 

rent minimum capital standards and 

demonstrate that it is not feasible for 

them to attain compliance with their 

minimumcapital requirements by under 

taking standard conversions. The con 

version would require, among other 

things, a determination that the con 

verting or resulting association will meet 

its current minimum capital require 

ments after conversion and that the 

conversion is in the best interests of the 

association, its account holders, the 

federal deposit insurance system and the 

public. The Director of OTS may deter 

mine that factors particular to an asso 

ciation, its conversion, or its acquirers, 

require an infusion of capital into the 

association in excess of that amount. 

FR, 1/17/92,p. 206i;NEWS, OTS, 1/17. 

Risk-Based Capital 

Amendments 

The OTS is revising its risk-based 

capital regulation to include in the 50 

percent risk-weight category certain 

construction loans to finance the 

building of presold, 1-4 family resi 

dences. To qualify, the loans must 

satisfy specific prudential criteria and 

conservative underwriting standards. 

Among the requirements is that the 

builder must have substantial equity 

at risk in the construction project, and 

the homes generally must be sold 

under firm contracts to purchasers 

who have obtained firm commit 

ments for permanent qualifying 

mortgages. Effective May 13, 1992. 

FR, 4/13/92,p. 12706. 

The OTS proposed amending its 

risk-based capital regulation. FR, 

4/13/92, p. 12761. 

Securities Activities 

The OTS issued guidelines on 

savings associations' securities ac 

tivities, effective February 10. The 

guidelines, which are the same as 

those being issued for banks and 

credit unions by their respective 

federal regulatory agencies, have 

been approved by the FFIEC. 

NEWS, OTS, 1/10/92; Thrift Bulletin 52, OTS, 

1/10. 

Operating Subsidiaries and 

Service Corporations 

The OTS proposed authorizing 

federal savings associations to estab 

lish and acquire "operating sub 

sidiaries." These units would be 

distinguishable from service corpora 

tion subsidiaries, and would engage 

exclusively in activities authorized for 

all federal associations. 

The agency also proposed amend 

ments affecting service corporations, 

among which is to require that "prob 

lem associations" apply for permis 

sion before they may make an 

investment in service corporations. 

FR, 4/9/92, p. 12226. 

49 
FDIC Banking Review 

Geographic Distribution of 

Lendingfor CRA 

The OTS adopted a policy state 

ment on the analysis of geographic 

distribution of lending for CRA pur 

poses, as recommended by the 

FFIEC. 

The policy statement affirms that 

financial institutions need to analyze 

the geographic distribution of their 

lending patterns as a part of their CRA 

planning process, indicates what the 

agencies expect of the institutions 

they supervise, and gives guidance on 

how financial institutions can meet 

these expectations. Thrift Bulletin 47-2, 

OTS, 1120192. 

Business Transactions 

with Officials 

The OTS proposed a new regula 

tion to govern business transactions, 

other than extensions of credit, be 

tween savings associations and their 

insiders. This proposed rule would be 

substantially similar to regulations 

recently proposed by the FDIC (see 

ihxsReview, Fall 1991, p. 38). FR.4/9/P2, 

p. 12232. 

Executive Compensation 

The OTS issued a guidance for 

regulatory review of employment 

contracts and unsafe and unsound 

practices in savings associations relat 

ing to executive compensation. 

As a general rule, OTS defers to 

the savings association's board of 

directors concerning executive com 

pensation arrangements, provided the 

association is not a problem associa 

tion, and the compensation arrange 

ments do not present safety

and-soundness concerns. OTS re 

quires the board of each association to 

conduct an annual documented 

process of review and justification of 

employment contracts and compen 

sation arrangements for the senior ex 

ecutives. Problem associations are 

subject to written agreements that re 

quire them to submit employment 

contracts for senior executive officers 

and directors to the OTS Regional 

Director for prior review. 

Several illustrations are provided 

of compensation provisions con 

sidered to be unsafe and unsound, 

among which are: a) compensation 

arrangements that provide incentives 

contrary to the safe-and-sound opera 

tion of the association, b) compensa 

tion arrangements that provide for 

excessive compensation when com 

pared with that paid to others with 

similar duties in other institutions 

with similar characteristics, c) con 

tracts that contain automatic renewals 

or extensions of the contract without 

providing for explicit review and ap 

proval by the board of directors, d) 

contracts that provide for an excessive 

term—a term exceeding three years is 

generally objectionable, and e) con 

tracts that have severance pay arrange 

ments greater than the individual's 

annual salary for the preceding year. 

Regulatory Bulletin 27, OTS, 1118191. 

Savings Association 

Membership in FHLBank 

System 

The OTS proposed to require 

Federal Home Loan Bank member 

ship for all savings associations. It 

would apply equally to federally and 

state-chartered savings associations 

regardless of whether an association's 

deposit insurance is explicitly condi 

tioned upon FHLBank membership. 

The proposal is intended to address 

issues involving the interrelationship 

between thrift safety and soundness 

and FHLBank membership. FR, 

3112192, p. 8732. 

Applications Restructuring 

The OTS adopted a comprehen 

sive restructuring of its applications 

procedures. The purposes are, in part, 

to: eliminate or streamline the exist 

ing application or notice require 

ments for many types of transactions 

or activities; establish "standard" and 

"expedited" application and notice 

processes that increase the flexibility 

of savings associations with satisfac 

tory MACRO, Community Reinvest 

ment Act and Compliance ratings to 

engage in certain new activities; and 

discourage applications by associa 

tions with lower ratings to engage in 

new activities unless the proposed ac 

tivity would clearly improve their con 

dition or performance. FR,4/20192, 

p. 14329. 

Supreme Court Lets Stand 

Restriction on Goodwill 

The U.S. Supreme Court declined 

to review an appeal by Franklin 

Federal Savings Bank, Morristown, 

Tennessee, of a U.S. appeals court 

decision that reversed a district court 

and upheld an OTS action preventing 

Franklin from counting goodwill as 

capital. 

FIRREA permitted the inclusion 

of only a minimal amount of super 

visory goodwill in core capital which 

could be not less than three percent of 

assets. Under an earlier 1989 agree 

ment with the Federal Home Loan 

Bank Board, Franklin was allowed to 

account for the negative net worth of 

Morristown Federal Savings & Loan 

Association, which it acquired, as su 

pervisory goodwill over a 25-year 

period. Franklin, and other thrifts 

that have filed similar suits, argued 

that the government should not be 

allowed to renege on these commit 

ments. AB, 11/5191, p. i. 

Thrifts Monthly Reporting 

to Stop 

The OTS will eliminate the 

monthly Thrift Financial Report as of 

January 1, 1993. Currently, savings 

institutions must prepare and submit 

both monthly and quarterly financial 

reports to OTS. Some monthly re 

quirements will remain, specifically 

[he collection of data necessary to 

preserve and maintain various adjus 

table-rate mortgage indexes. In addi 

tion, OTS Regional Directors will 

continue to have the authority to re 

quire specific reports from problem 

institutions. NEWS, OTS, 4/2/92. 

Review of Third-Party 

Contracts 

An OTS issuance states that in re 

gard to savings associations' employ 

ment of outside professionals, such 

as lawyers, for services not usually 

50 
Recent Developments 

required in che normal course of busi 

ness (for example, in connection with 

proposed mergers, or capital-raising 

efforts), a review of these contracts at 

failed institutions indicates that fre 

quently they have been a waste of 

scarce resources. Such contracts re 

quire justification and approval by the 

board of directors of the savings as 

sociation and, where the association 

has a MACRO rating of 4 or 5, prior 

review by the OTS Regional Direc 

tor. 

Among the guidelines for 

regulatory review of such contracts 

are: a) the services must be clearly 

identified and related to the 

association's approved business or 

capital plan, b) evidence that fees to 

be paid and terms of payment are 

within prevailing market norms and 

are consistent with the interests of the 

insurance fund, and c) inclusion in 

reimbursable expenses of only neces 

sary costs directly related to the ser 

vice provided. Thrift Bulletin 50, OTS, 

nn mi. 

Thrift Examiner 

Accreditation Programs 

Two new thrift examiner ac 

creditation programs will recognize 

specialists in the fields of compliance 

with consumer and non-discrimina 

tion laws and electronic data process 

ing. To qualify for the programs, an 

examiner must have a minimum of 

two years relevant work experience, 

must complete certain courses, and 

pass a written test of new com 

petence. A newly accredited ex 

aminer will be designated either a 

Federal Compliance Regulator 

(FCR) or a Federal Information Sys 

tems Regulator <FISR), qualifying 

[he individual to lead examinations of 

institutions in the compliance or EDP 

areas. The specialized accreditation 

programs will be fully implemented 

by April 1, 1992. Subsequently, only 

accredited examiners or those ex 

empted from the program because of 

a high level of prior experience will be 

allowed to conduct thrift compliance 

or EDP examinations. NEWS, OTS, 

12119191. 

Federal Financial Institutions 

Examination Council 

Securities Activities 

The FFIEC recommended that its 

five member agencies adopt 

revisions to a policy first adopted in 

1988 regarding depository insti 

tutions' securities activities. The ear

lier statement emphasized the 

importance of knowing the securities 

firms with whom a depository institu 

tion does business, and also dealt with 

concerns pertaining to speculative 

and other activities improperly car 

ried out in an institution's investment 

portfolio. It also identified risks as 

sociated with stripped mortgagebacked securities, residuals, and 

zero-coupon bonds and concluded 

that they may be unsuitable invest 

ments for depository institutions. 

The new Statement of Policy 

provides additional information on 

portfolio policies, strategies, and prac 

tices that are inappropriate for an in 

vestment account, and whether the 

reporting of an institution's invest 

ment portfolio holdings is consistent 

with its intent and ability. In addition, 

this policy statement establishes a 

framework for determining when a 

mortgage derivative product is a highrisk mortgage security; and, once a 

mortgage derivative product is deter 

mined to be high-risk, it must be held 

in a trading or for sale account. Press 

Release, FFIEC, 12/3/91; FR, 2/3/92, p. 4028. 

Geographic Analyses of 

CRA Lending 

For compliance with the Com 

munity Reinvestment Act, the 

FFIEC approved, and recommended 

for adoption by the FRB, FDIC, OCC 

and OTS, a policy statement on the 

need for institutions to analyze the 

geographic patterns of their CRA 

lending, what the agencies expect of 

the institutions they supervise, and 

how the institutions can meet these 

expectations. 

As an integral part of effective 

CRA management, analyses of the 

geographic distribution of credit ap 

plications, credit extensions, and 

credit denials should be appropriately 

documented and made readily avail 

able to examiners. The key to the 

analyses is the demonstration of lend 

ing activities in response to identified 

credit needs within the institution's 

delineated community. The state 

ment notes that the type and sophis 

tication of the analysis will vary 

depending on the size of the institu 

tion, the number and types of 

products it offers, and other factors. 

The agencies do not intend to 

prescribe a data system that is ap 

propriate for every institution in every 

setting, but to provide guidance on 

systems the institutions might con 

sider when initiating such a program. 

Press Release, FFIEC, 12/17/91. 

Prescreening Under the Fair 

Credit Reporting Act 

(FCRA) 

The FFIEC approved a policy 

statement concerning prescreening 

by financial institutions under the 

FCRA. In prescreening, a consumer 

reporting agency (credit bureau) com 

piles or edits a list of consumers meet 

ing specific credit-granting criteria 

provided by an institution, and 

provides the list to the institution or a 

third party acting for the institution 

for use in soliciting specific con 

sumers for credit products. 

The policy statement addresses 

several concerns not covered in a 

Commentary issued by the Federal 

Trade Commission in May 1990. For 

example, the statement provides that 

an institution may withdraw an offer 

of credit if a significant change, such 

as foreclosure, or garnishment, takes 

place between the prescreen and the 

consumer's acceptance of the credit 

offer. However, the FFIEC believes 

an institution may not condition or 

withdraw a credit offer if the con 

sumer fails to meet a specified income 

level or debt-to-income ratio. F1L-62

91, FDIC, 12/13/9)■; Press Release, FFfEC, 11/22 

51 
FD1C Banking Review 

Withdrawal of Proposed 

Requirement for Electronic 

Submission of Call Reports 

The FFIEC is withdrawing its 

recently proposed timetable under 

which banks would have been re 

quired to file their Reports of Condi 

tion and Income (Call Reports) 

electronically. Under the proposal, 

banks with $100 million or more in 

total assets would have been required 

to start transmitting their Call Reports 

electronically as of March 31, 1992, 

with other banks required to begin 

doing so over the following two years 

(see this Review, Fall 1991, p. 49). 

The FFIEC continues to strongly 

urge all banks to consider the merits 

of transmitting their reports electroni 

cally. F1L-09-92, FDIC, 1131/92. 

Community Reinvestment Act 

To help Financial institutions meet 

their CRA responsibilities and to in 

crease public understanding of the 

regulations and examination proce 

dures, the staffs of the FRB, FDIC, 

OTS, and OCC have prepared 

answers to the most commonly asked 

questions about community reinvest 

ment. The answers should not be 

regarded as official interpretations, 

but rather to provide useful informa 

tion to agency personnel, financial in 

stitutions and the public. FR,3/2i/92,p. 

10899. 

National Credit Union 

Administration 

Investment and Deposit 

Activities 

The NCUA is requiring each 

federal credit union to establish writ 

ten investment policies, and is 

restrictingcredit unions' access to cer 

tain high-risk investments. The rule 

permits, in respect to investments 

so restricted, their acquisition for 

the sole purpose of reducing an 

institution's interest-rate risk. CUs 

that purchase the high-risk invest 

ments are required to have a monitor 

ing and reporting system in place that 

will document the performance of the 

securities. Federal CUs are prohib 

ited from purchasing zero-coupon 

securities with remaining maturities 

of more than ten years. There is a 

"grandfather" provision for existing 

holdings of certain securities, though 

if NCUA finds they constitute a sig 

nificant threat to an institution's 

soundness the agency will seek the 

disposal of the securities. Effective 

December 31, 1991 and (part) March 

1, 199Z. FR, 10/31/91,p.5600,-BBR, 10/21,p. 

654. 

State Legislation and 

Regulation 

Qualifying for City Deposits 

District of Columbia: The D.C. 

Council passed legislation authoriz 

ing the Mayor to remove some restric 

tions on depositing city funds in 

neighborhood bank branches 

threatening to close. Banks agreeing 

to keep open branches in low-income 

or economically depressed neighbor 

hoods would be eligible to receive city 

deposits even though under other 

rules a bank would not qualify. For 

purposes of receiving city deposits, 

banks are rated in a system that takes 

into account employment practices, 

the percentage of loans to city resi 

dents and businesses, and the per 

centage of loans to women and 

minorities. The Washington Times, 1/8/92. 

Insurance Law Upheld 

Florida: An appeals court upheld 

the state's law that prohibits banks, 

with some exceptions, from acting as 

insurance agents. In a divided opinion 

that upheld a lower court decision, 

the appeals court said the law is re 

lated to legitimate state goals such as 

"prevention of coercion, unfair trade 

practices and undue concentration of 

resources." Thrift institutions that 

brought the suit claimed the law 

violates equal-protection and 

due-process provisions of the 

Constitution. ABA Bankers Weekly, 

10/22/91, p. 5. 

Multistate Taxation 

Illinois: A new law, effective Sep 

tember 23, 1991, imposes financial 

reporting requirements on non-resi 

dent financial institutions domiciled 

in states that impose out-of-state 

taxes on Illinois financial institutions. 

Such institutions must file an exten 

sive activity report annually with state 

authorities. Currently, Indiana, Iowa, 

Minnesota, Tennessee, and West Vir 

ginia impose out-of-state bank taxes. 

Illinois Banker, 12191,p. IS; ABA Bankers Weekly, 

10/15/91, p. 7. 

West Virginia: A recently enacted 

law, similar to ones in effect in Indiana 

and Tennessee, imposes taxes on out

of-state financial institutions that 

transact business in West Virginia. A 

franchise tax is put on capital derived 

from West Virginia, and a net income 

tax on income derived from the state. 

In general, institutions are subject to 

the taxation if they solicit or do busi 

ness with 20 persons or more in West 

Virginia, or their annual gross receipts 

from sources in the state are at least 

$100,000. ABA BankersWeekly, 10/15/91',p. 7. 

Holding Company Services 

Expanded 

Illinois: A new law, effective July 

1,1992, will allow customers within a 

multibank holding company to cash 

checks, make deposits and make pay 

ments on existing loans at other af 

filiates owned by the same holding 

Company. Northwestern Financial Review, 

2/S/92,p.lO. 

Interstate Banking 

Connecticut: A recent statutory 

amendment allows banks in the state, 

including those owned by out-of-state 

holding companies, to acquire the 

assets, as well as the stock, of statechartered banks. Previously, out-of

state holdingcompanies were allowed 

to purchase only the stock of a Con 

necticut bank. The amendment 

enabled Chase Manhattan Bank of 

Connecticut to take over the $132.4 

million-asset Fairfield County Trust 

Co. Fairfield was too small to qualify 

under a federal law that permits the 

FDIC, for failed banks with assets 

over $500 million, to preempt state 

laws and transfer the bank's assets to 
Recent Developments 

a bank owned by an out-of-state com 

pany- BBR, 4120192, p. 6S3. 

Illinois: Banks in Illinois and Iowa 

will be able to acquire banks in each 

other's state beginning on January 1, 

1992. An Iowa law that prevents 

ownership of state-chartered banks by 

out-of-state banks and holding com 

panies will expire at the beginning of 

Che year. ABA Bankers Weekly. 11112/91.p. 10. 

Intrastate Branching 

Illinois: The Governor signed 

legislation extending to two years the 

six-month relocation permitted for 

former branches purchased by banks 

from the RTC. The "grandfathered" 

branching rights are extended to all 

banks within a bidding consortium. 

Illinois Banker, 12191, p. IS. 

Senior Citizen Banking 

Illinois: Under a new law effective 

January 1, 1992, banks may provide 

off-premises banking services to per 

sons residing in nursing homes, retire 

ment homes and long-term-care 

facilities. Such locations will not be 

considered a branch. Illinois Banker, 12191, 

p. IS. 

Court Upholds Card LatePayment Charges 

Massachusetts: A federal judge 

upheld a state law that prohibits ouc

of-state banks from imposing late 

charges on credit-card customers in 

Massachusetts. 

The case involved Greenwood 

Trust Co., a Delaware subsidiary of 

Sears Roebuck Co., which issues the 

Discover card. Greenwood's agree 

ment with its credit-card customers 

specifies that it is governed by the 

state of Delaware and applicable 

federal laws, under which it imposed 

a $10 charge for late payments. 

Massachusetts' law prohibits latepayment charges on open-end creditcard accounts. 

The Depository Institutions 

Deregulation and Monetary Control 

Act of 1980 provided that state banks 

may charge interest at the same max 

imum rate allowed for national banks, 

i.e., one percent above the Federal 

Reserve discount rate, but permitted 

states to enact legislation within a 

three-year period to override the 

federal preemption of state usury 

laws. Massachusetts is among the 15 

states that have enacted such legisla 

tion. BBR, ll/4,p. 735. 

Appraiser Licensing 

New York: The State Board of Real 

Estate Appraisal on an emergency 

basis adopted qualifying standards for 

licensing and certify ing appraisers, ef 

fective February 1, 1992. The new 

rules include, in part: provision for 

reciprocal licensing for appraisers 

from another state, provided they 

meet certain requirements; estab 

lishing education requirements for 

caking the qualifying examination; 

content of the qualifying examina 

tion; and minimum standards for an 

appraisal, consistent with those 

prescribed by the Appraisal Founda 

tion. Legal and Regulatory Update, New York 

State Bankers Association, 3j13192. 

Fees for Thrift 

Checking Accounts 

New York: new law permits statechartered savings banks and savings 

and loan associations to charge fees for 

checking accounts, a power already 

granted to state-chartered commer 

cial banks and federally chartered 

thrifts. The law was effective imme 

diately. Many thrifts in the state have 

offered negotiable order of 

withdrawal (NOW) accounts, for 

which they may charge a fee, instead 

of free checking. NOWs usually re 

quire higher minimum balances. BBR, 

4121192, p. 733. 

Credit-Card Provisions 

New York: The Governor signed a 

law that is aimed at making the state's 

banks more competitive. It permits 

credit-card issuers to immediately 

charge penalty fees to customers who 

are late in their payments currently 

there is a ten-day delay period. 

Eliminated for variable-rate cards is a 

requirement that the minimum and 

maximum interest rates be equally 

below/above the introductory rate. 

The new law, which was effective im 

mediately, expires on the same date, 

June 30, 1993, as a law that deregu 

lated interest rates on retail install 

ment credit. BBR, 2124192, p. 307. 

Virginia: The legislature passed a 

bill, requested by the Governor, chat 

will permit issuers of credit cards to 

impose a fee on late payments. The 

Washington Post, 4/16/92, p. A16. 

"Lifeline" Law Claimed 

Applicable to National 

Banks 

New Jersey: New Jersey's Banking 

Commissioner disagrees with an in 

terpretation by the OCC that the 

state's "lifeline" checking account 

law is preempted by federal lawwhich 

expressly makes the offering of such 

accounts voluntary. The state law 

would require banks in the state to 

offer consumer checking accounts for 

which the initial deposit could be 

$100 or less, the minimum balance to 

maintain the account would be no 

more than $25, and eight free 

withdrawals by check permitted in a 

given cycle. ABA Bankers Weekly, 4/21/92,p. 6 

Banks Can Be Licensed 

as Insurers 

Ohio: The state Supreme Court, in 

the case of Independent Insurance 

Agents of Ohio vs. Fabe, ruled that 

the state's insurance statutes do not 

prohibit banks and their affiliates 

from obtaining insurance licenses. In 

1989, the Department of Insurance 

issued rules and started to accept ap 

plications for licenses, in response to 

which the insurance agents filed the 

lawsuit. ABA Banters Weekly, 4/21/92, p. 3. 

State Farm-Bank 

Loan Program 

Oklahoma: More than 200 banks in 

the state are participating in the 

Agricultural Linked Deposit Pro 

gram, started in 1988. Under the pro 

gram, the State Treasurer purchases a 

certificate of deposit having an inter 

est rate of three percent less than the 

daily rate on Treasury notes. bank 

can lend the funds at a rate up to 5.5 

53 
FDIC Banking Review 

percent above whac it is paying on the 

CD. The maximum loan is $350,000 

for some kinds of farming, and for 

Others it is $1 million. Typically the 

loans are for two years, but may be 

extended for another year. ABA Banters 

Weekly, 10115/91,p. 7. 

Deposits Paid in Closed 

Credit Unions 

Rhode Island: The Governor 

signed legislation that provides for 

payment of the deposits of remaining 

credit unions that closed on January 1, 

1991, after the Rhode Island Share 

and Deposit Indemnity Corp. was 

declared insolvent (see this Review, 

Spring/Summer 1991, p. 51). Most of 

the 45 credit unions and loan and in 

vestment banks that closed were able 

to obtain federal deposit insurance, 

while others were liquidated or 

merged. Ten institutions remain 

closed, of which six are in the process 

of being acquired by other financial 

groups. ABA Bankers Weekly, 3131192,p. 6. 

Bank and Thrift Performance 

BIF-Jnsured Banks' Net 

Income Higher in 1991 

Insured commercial banks earned 

$18.6 billion in 1991 (preliminary 

data), up by 15 percent from $16.1 

billion in 1990. More than 89 percent 

of the institutions were profitable in 

1991, increasing from 86 percent in 

1990. In the fourth quarter, banks' net 

income totaled nearly $3.7 billion, up 

$2.8 billion from the fourth quarter of 

1990. 

Except for gains from sales of in 

vestment securities of nearly $3.0 bil 

lion in 1991, aggregate net income 

would have been lower than in 1990. 

Gross interest income was down by 

9.7 percent in 1991; however, interest 

expense was 18.4 percent lower, 

resulting in a $6.4 billion (5.6 percent) 

rise in net interest income to $121.9 

billion. Noninterest income was 8.4 

percent higher in 1991. The major 

offsetting expense increases were 

noninterest expenses, up by 7.6 percent, 

to $124.5 billion, and a 5.7 percent 

increase in provision for loan losses. 

Banks in the West accounted for most 

of the increase in loan-loss provision 

ing, while banks in the Northeast 

reported a lower amount compared to 

1990. 

Commercial banks' equity capital 

totaled $232.2 billion at year-end 

1991, increasing to 6.77 percent of as 

sets from 6.46 percent a year earlier. 

Net charge-offs were 1.60 percent of 

loans in the year, up from 1.44 percent 

in 1990 and 1.16 percent in 1989. At 

year-end, noncurrent loans and leases 

plus other real estate owned were 2.99 

percent of assets, increasing from 2.90 

percent in 1990 and 2.26 percent in 

1989. 

BIF-insured savings banks 

reported an aggregate net loss of near 

ly $1.2 billion in 1991, an improve 

ment from the $2.6 billion loss in 

1990. The loss in the fourth quarter 

was $423 million, down from $1.2 bil 

lion in the same 1991 period. To a 

significant extent the better results in 

1991 reflect the resolutions by the 

FDIC of nineteen failing savings 

banks in the year. 

Assets of BIF-insured savings 

banks shrank by 8.3 percent in 1991 

to $237.4 billion. Their equity capital 

declined by $1.1 billion to $16.0 bil 

lion; however, equity capital was a 

slightly higher percentage of assets, 

6.74 percent, compared to 6.62 per 

cent the year before. Past-due and 

noncurrent loans and leases were 8.99 

percent of total loans and leases at the 

year-end, increasing from 8.81 per

cent at year-end 1990. The FDICQuarterly 

Banting Profile, Fourth Quarter, 1991. 

Bank Capital Raising 

Stronger in 1991 

A survey showed that U.S. com 

mercial banks issued nearly $3.3 bil 

lion in common stock in 1991, and 

$4.2 billion in preferred stock, both 

counting as Tier 1 capital. Banks also 

issued $21.4 billion in new bonds in 

the year. These amounts were well 

above the $1.8 billion of stock, and 

$7.7 billion in debt issued, in 1990. 

Analysts believed that much of the 

funds raised in 1991 would be applied 

to strengthening the banks' capital 

positions. The FDIC reported for 

U.S. commercial banks that the 

average equity capital-to-assets ratio 

as of September 30, 1991 was 6.71 

percent, up from 6.45 percent on 

December 31, 1990. Investor Business 

Daily, 117192; KB, 116, p. 1. 

Number of Bank Failures 

Declined in 1991 

Failures of BIF-insured institu 

tions fell from 168 in 1990 to 124 in 

1991, die lowest number since 1985. 

One hundred three of these cases 

were resolved by the purchase-and

assumption method, 17 by insureddeposit transfer, and four by deposit 

payoff. In addition, there were 28 

non-failure cases requiring the 

FDIC's disbursements, including 25 

handled as whole bank P&As, and 

three were open-bank assistance 

transactions. 

Assets in cases requiring FDIC dis 

bursements were considerably higher 

than in 1990. Eleven banks with as 

sets over $1 billion were resolved in 

1991, nf which nine were in the New 

England states, while only two $1 bil 

lion banks closed or needed assistance 

in 1990. Failures in Texas dropped 

from 103 in 1990 to 31 in 1991. 

Thrifts' Performance 

Improved in 1991 

The nation's private-sector thrifts 

reported net income of $893.6 million 

in the fourth quarter of last year, and 

$1.97 billion for the year, making 1991 

the first year since 1985 that the in 

dustry was profitable in every quarter, 

and the first profitable year as a whole 

since 1986. In 1990, the industry had 

losses of $1.5 billion in the last 

quarter, and $2.9 billion in the year. 

The 2,096 private-sector thrifts 

operating throughout 1991, and 

remaining in the private sector, 

reported profits of $2.3 billion in the 

year. Eighty-six percent of these in 

stitutions were profitable in the fourth 

quarter. 

54 
Recent Developments 

The profitability of the industry in 

the last quarter of 1991 is attributable 

to several factors, including: a) con 

tinued decline in interest rates, result 

ing in a greater reduction in interest 

expense than in interest income; b) 

continuing transfer of failed institu 

tions and their resolution through the 

Accelerated Resolution Program; and 

c) gains from the sale of assets, reflect 

ing a strategy of many institutions of 

downsizing to meet capital require 

ments. 

Tangible capital of the private-sec 

tor thrifts rose to 4.89 percent at the 

close of 1991 from 3.76 percent at 

year-end 1990. The number of insol 

vent thrifts, based on tangible capital, 

declined to 33, or 1.57 percent of the 

industry at year-end 1991, from 112 a 

year earlier. Supervisory groupings of 

the private-sector thrifts at the close 

of 1991 consisted of: 983 well-capital 

ized and profitable thrifts (Group I); 

676 thrifts that meet or are expected 

to meet their capital requirements 

(Group II); 372 institutions con 

sidered by OTS to be "troubled" 

(Group III); and 65 institutions ex 

pected to require federal assistance 

(Group IV). Since the end of 1991, 10 

Group IV institutions have been 

transferred to the RTC, leaving 55. 

with assets totaling $35 billion, in this 

Group. NEWS, OTS,3110192. 

Credit Unions' Growth 

Continued in 1991 

Assets of federally insured credit 

unions totaled $227.1 billion at year

snd 1991, about 63 percent held by 

8,229 federally chartered credit 

unions, and 37 percent by 4,731 statechartered credit unions. The industry 

continued to experience strong over 

all growth, as aggregate assets rose by 

14.6 percent in the year, although 

loans increased by only 4.1 percent. 

Insured credit unions had $21.4 

billion in gross income in 1991, 5.9 

percent more than in 1990. Their net 

income increased by over 33 percent 

to $1.8 billion, representing an in 

crease in return-average assets from .8 

percent to one percent. 

Key financial ratios give further 

evidence of an improvement in the 

industry's performance in 1991; for 

example, delinquent loans declined 

to $2.1 billion from $2.2 billion and as 

a percentage of assets these loans fell 

to 1.59 percent from 1.70 percent in 

1990. Total capital-to-total assets rose 

to 8.5 percent from 8.2 percent. Yearend Statistics for Federally Insured Credit Unions, 

1990and 1991, NCUA. 

Supermarket Banking 

Continues Growth 

In the first nine months of 1991 the 

number of full-service branches in su 

permarkets nationwide increased by 

187 locations to 1,108, with a 

predicted rise to 1,500 in-store 

branches by the end of 1992. Super 

market branches now combine 

deposit and loan activities, contrast 

ing to the 1970s when they were most 

ly check-cashing facilities, and the 

1980s when the emphasis on using 

them was for deposit-taking. Super 

market branches are more convenient 

in respect to banking hours, are less 

expensive to build and maintain, and 

can attain profitability in much less 

time than a free-standing branch typi 

cally requires. Northwestern Financial 

Review, 11/9/91, p. 26. 

ATM Usage Increasing 

About 35 percent of bank cus 

tomers now use automated teller 

machines, the first time usage has ex 

ceeded one-third, according to the 

American Bankers Association. Each 

teller machine on average in 1991 was 

used for 6,403 transactions per month, 

up from 5,980 (7.1 percent) in 1990 

and 5,638 (13.6 percent) in 1989. One 

reason for the growing use of the 

machines is the service being offered; 

for example, a customer wanting to 

locate the nearest ATM on the CIR 

RUS network can call a toll-free 

telephone number, enter the area 

code and the exchange prefix of the 

telephone they are using, and receive 

by recorded message the machine's 

location and its hours of operation. 

Northwestern Financial Review, 12/14/91, p. 2. 

Recent Articles and Studies 

Quantifying the Role of 

Management 

This article by Thomas F. Siems 

presents a model for computing a 

quantitative measurement for 

management efficiency that uses 

"data envelopment analysis" (DEA), 

a linear programming technique 

which has had numerous applications 

outside the banking industry. 

The role of bank management is 

viewed as that of integrating policies 

and techniques for managing the 

organization's money position, 

providing liquidity, lending profitab 

ly, and investing rationally in a practi 

cal asset/liability framework. The 

most efficient banks do this by con 

trolling operating expenses, manag 

ing interest-rate sensitivity, utilizing 

risk-management techniques, and 

strategically planning for the bank 

and its markets for the future. DEA 

computes a bank's efficiency in trans 

forming inputs into outputs, relative 

to its peers. Because managers make 

vast numbers of decisions, a multipleinput, multiple-output model, the 

writer states, is more suitable and un 

derstandable than quantities of num 

bers presented in single input-output 

ratios, in which one ratio may show a 

highly efficient bank and another may 

show an inefficient operation. 

In stage one of the model, which is 

attracting deposits, the inputs are the 

number of full-time equivalent 

employees, salary expenses, other 

noninterest expense, premises and 

fixed assets, total interest expense, 

and purchased funds. The output of 

this stage is total deposits. In stage 

two, which is making loans and invest 

ments, the inputs consist of the first 

four inputs above, and the outputs are 

earning assets and total interest in 

come. To test the usefulness of DEA, 

average scores of a group of failed 

banks were compared with the scores 

of surviving banks. The surviving 

banks—611 institutions randomly 

selected—were institutions in opera 

tion from 1984 through 1989, and the 

55 
FDIC Banking Review 

failures were 319 banks declared in 

solvent by a regulatory agency be 

tween 1986 and 1988. 

The study concludes that long 

before failure occurs there appear to 

be significant statistical differences 

between the quality of management 

for banks that fail, and those that sur 

vive. It is recognized that the efficien 

cy measure is highly sensitive to the 

variables selected; however, those 

identified here differentiate effec 

tively between surviving and failed 

banks. The model has many applica 

tions to banking, including use for an 

early-warning model, and use by 

regulators in identifying the most in 

efficient banks that require the 

greatest attention, and for construct 

ing a hypothetical efficient banking 

operation to help an institution focus 

on its problem-areas, such as overutil

ized inputs. Economic Review, Federal Reserve 

Batik of Dallas, 1st Quarter 1992, pp. 29-39. 

Size ofBanking Markets 

In this study, Stephen A. Rhoades 

examines whether local market con 

centration and other local market con 

ditions have a systematic influence on 

mortgage interest rates, that is, on the 

price of mortgages. It also tests the 

price-concentration relationship, a 

much debated issue in general an 

titrust analysis. 

Of all banking services, mortgage 

lending may be the most affected by 

developments tending to widen 

geographic markets. Such loans repre 

sent by far the largest and longestterm financial service purchased by 

most consumers, and thus consumers 

presumably would be willing to incur 

greater transactions costs in searching 

for a low-cost mortgage than they 

would in obtaining other financial ser 

vices. This should generally expand 

the size of the geographic market and 

drive mortgage interest rates toward a 

competitive level. Furthermore, in 

recent years, mortgages have been 

packaged as the basis for mortgagebacked securities, which are sold in 

national markets, as are the mortgages 

themselves. These arguments sug 

gest that mortgage rates should pro 

vide a relatively stringent test of the 

proposition that the market for bank 

ing services is local. 

The study analyzes more than 

13,500 observations of mortgage in 

terest-rate terms and noninterest-rate 

terms covering a 16-week period for 

20 U.S. cities from late 1987 through 

early 1988. The sample included all 

the major types of mortgage 

originators in the United States— 

commercial banks, savings and loan 

associations, savings banks, credit 

unions, and mortgage banks. 

The models indicate that local 

market conditions influence mort 

gage interest rates. Market growth 

and per capita income are the most 

important variables, but the Herfin

dahl index, a measure of market con 

centration, also plays a role after 

controlling for costs. These results 

suggest that analyzing bank competi 

tion within local geographic markets 

is still appropriate. Moreover, the 

results suggest that market concentra 

tion, as measured by the H-index, af 

fects the prices charged in local 

markets for mortgages. This would 

appear to support the traditional 

market-power explanation for the 

market structure-performance rela 

tionship. Federal Reserve Bulletin, February 

1992. 

Cost Savings from Bank 

Mergers 

In this article, Aruna Srinivasan 

and Larry D. Wall address the issue of 

whether bank mergers will result in 

substantial cost savings due to im 

proved efficiency. 

The study examines the change in 

noninterest expenses of mergers 

during the period from 1982 to 1986. 

Noninterest expenses are defined as 

salaries, premises, and other expen 

ses. The main reasons for the choice 

of period were that the trend toward 

decontrol of deposit interest rates had 

been well-established and sufficient 

cost data were available to adequately 

analyze the post-merger experience 

of the combined organizations. The 

analysis is limited to those mergers in 

which the acquirer and target had as 

sets of at least $100 million at the end 

of the year prior to the merger. 

Among other criteria was that the two 

organizations were previously unaf

filiated. There were 240 merger trans 

actions completed within the period 

which met those criteria. 

Two specific limitations in respect 

to applying the results of the study to 

"current megamergers" are cited: a) 

none of the merger pairs in the sample 

is as large as some of the proposed 

combinations, and b) many of the ac 

quirers during this period may not 

have planned on realizing any cost 

savings. 

On the whole, the results offer no 

support for claims of significant cost 

savings from bank mergers. "Our 

results," the authors say, "should add 

a healthy dose of skepticism to che 

claims being made about the cost 

savings associated with bank mergers. 

Investors and regulators should care 

fully scrutinize cost savings claims 

before bidding up stock prices or ap 

proving otherwise questionable 

mergers." Federal Reserve Bank of Atlanta, 

Working Paper 92-2, February 1992. 

Deposit Insurance Reform 

This study by Panos Konstas finds 

that the present system of defacto full 

insurance coverage of deposits en 

courages banks to take on highly risky 

assets. A plan is presented for adding 

market discipline and an alternative 

structure for the deposit insurance 

system. 

Under the proposal, private, forprofit companies called "deposit in 

termediators and guarantors" (DIGs) 

would have an essential role as in 

surers of bank deposits and as deposit 

intermediators. DIGs could be singleentity firms devoted entirely to 

deposit insurance, or units of larger 

and more diversified insurance or 

ganizations. As insurers, DIGs would 

offer insurance only for demand 

deposits, and on amounts in excess of 

what government deposit insurance 

will cover, currently $100,000 per 

56 
Recent Developments 

depositor. The FDIC would continue 

to insure deposits (other Chan those of 

DIGs) up to the statutory limit per 

depositor, and would retain its exist 

ing supervisory and regulatory 

authority and functions with respect 

to federally insured depository in 

stitutions. As intermediators, DIGs 

would be at risk (up to the level of 

their capital) for losses on their 

deposits with banks. They will price 

their deposits and insurance coverage 

to reflect the risk factors in each bank. 

Funding for DIGs would come in 

part from market borrowings. This 

borrowing could be done on an in 

dividual basis, or through a common 

financing arrangement, such as the 

Federal Financing Bank. The debt 

would be fully guaranteed by the 

FDIC, enabling the DIGs to borrow 

at a virtually risk-free rate. 

DIGs would be regulated by the 

FDIC, which should rely primarily on 

capital requirements and limiting the 

amount of funds which each DIG 

could deposit or insure in any one 

bank. 

Through the market-determined 

interest rates for their deposits, by 

their monitoring of the performance 

and outlook for depository institu 

tions from the perspective of protect 

ing their own investments (uninsured 

deposits), and as insurers of excess 

deposits, DIGs would bring impor 

tant additional market discipline to 

bear on the system. As proposed, the 

FDIC's role in protecting deposits in 

excess of the statutory limit of in 

surance per depositor would be vastly 

reduced. These reforms, the author 

suggests, could improve the 

depository institutions' safety and 

soundness, reduce their regulation by 

government, and decrease the costs to 

the federal deposit insurance fund 

and the public. Journal of Retail Banting, 

Spring 1992, pp. 16-24. 

Market- Value Accounting 

This article by Thomas Mond

schean discusses issues involving the 

costs and benefits of market-value ac 

counting <MVA) for commercial banks, 

and offers suggestions for improve 

ments in the absence of a fully 

developed MVA system. 

The analysis of unsettled issues 

consists primarily of the views and 

conclusions found in the literature on 

these topics. There is a discussion of 

how the current historical cost ac 

counting system misrepresents the 

true economic value of financial in 

stitutions, and how a MVA system 

would work; also, whether the 

cost/benefit trade-off of MVA is dif 

ferent for large banks than for smaller 

institutions, and major criticisms 

raised about MVA. 

The writer suggests several chang 

es related to MVA that would improve 

the ability of regulators and investors 

to monitor the safety and soundness 

of the bankingsystem and to measure 

bank performance. Banks should be 

required to report the expected future 

cash flows (repayment of principal 

and interest) on their fixed-rate loans 

and time deposits as a function of the 

time when repayment is made. Cur 

rently, banks are only required to 

report the value of assets and 

liabilities which fall into different 

time periods. This information would 

greatly assist regulators in examining 

interest-rate risk. Banks should not 

have as much discretion to choose the 

time to realize gains or losses as they 

currently do. 

In particular, accounting rules for 

reporting nonperforming loans and for 

increasing loan-loss reserves need to 

be strengthened, and changes in 

credit risk must be reported sooner to 

regulators. Also, deposits held in 

foreign offices should be reported in 

the same detail as domestic deposits. 

Finally, greater public disclosure is 

necessary to enable investors to es 

timate bank net worth more accurate 

ly. Healthy banks would benefit from 

more disclosure, as reduced uncer 

tainty would raise their stock prices 

and lower their cost of capital. On the 

other hand, less well-capitalized 

banks would be subject to greater 

market discipline and thus have a 

stronger incentive to improve their 

net worth positions. Economic Perspectives, 

Federal Reserve Bank ofChicago, Januaiyll'eomary, 

I992,pp. 16-31. 

Report on Government 

Asset-Disposition Activities 

"fact sheet" prepared by the U.S. 

General Accounting Office (GAO) 

presents a summary of assets being 

held for disposition by federal agen 

cies as of September 30, 1990, and 

describes the extent of the government's 

involvement in asset-disposition ac 

tivities. GAO compiled the report 

from information obtained in a ques 

tionnaire sent to each agency and fol 

low-up inquiries. Generally it did not 

independently verify the information. 

Twenty-two agencies were iden 

tified as being involved in asset-dis 

position activities. A total of $192.8 

billion in assets were held for disposi 

tion as of September 30, 1990, of 

which the RTC held $142.2 billion, or 

73.7 percent, and the FDIC held 

$32.4 billion, 16.8 percent (as of 

November 30,1990). Over 72 percent 

of the total assets were financial assets, 

and these were held predominantly 

by the RTC and the FDIC. 

No government-wide standard ex 

ists for valuing the properties subject 

to disposition, the report said. The 

methods commonly used for this pur 

pose include: (a) acquisition cost, (b) 

book value (acquisition cost less 

depreciation), (c) appraisal value, and 

fd) market value (sales prices of 

similar assets). Of the eight agencies 

that held financial assets, seven used 

market value, or market value com 

bined with one or more other 

methods. Almost half of the 17 agen 

cies holding real property used the 

appraised value method, and about 

the same number used acquisition 

cost. For personal property, about half 

of the agencies holding such assets 

used acquisition cost, and slightly 

under a third used market value, ap 

praised value or book value. 

Most of the agencies said they 

coordinate asset disposals with one or 

more other government agencies. 

57 
All of them stated chat they have inter

nal controls to prevent conflicts of 

interest. 

The numerous statutes governing 

assetdispositionand the wide range of 

FDIC Banking Review 

agencies holding such assets have 

given rise co fragmented Congres

sional oversight of asset disposition. 

Twenty-five Congressional commit

tees were identified as having juris

diction for federal-agency asset-dispo

sition activities. In addition, ap

propriation and budget committees 

have general jurisdiction over all the 

agencies. AssetManagement- Government-wide 

Auet-Dispvsition Activities, U.S. General Account

ing Office, September 1991. 

58