19(Purchase and Assumption Transactions)
CHAPTER 3 – PURCHASE AND ASSUMPTIONTRANSACTIONS
Historically, the Federal Deposit Insurance Corporation (FDIC) has used three basic resolutionmethods: purchase and assumption (P&A) transactions, deposit payoffs, and open bank assistance(OBA) transactions. Of the three, purchase and assumption transactions are the most common.
Structure of a Purchase and Assumption Transaction
A P&A is a resolution transaction in which a healthy institution
some or all of the assetsof a failed bank or thrift and
some or all of the liabilities, including all insured deposits.P&As are less disruptive to communities than payoffs. There are many variations of P&Atransactions; two of the more specialized P&As are loss sharing transactions and bridge banks. Eachtype of P&A, including loss sharing and bridge banks, are discussed separately on the followingpages.In a P&A, the liabilities assumed by the acquirer include all or some of the deposit liabilities andsecured liabilities, for example, deposit accounts secured by U.S. Treasury issues and repurchaseagreements.
The assets acquired vary depending on the type of P&A. Some of the assets, typicallyloans, are purchased outright at the bank or thrift closing by the assuming bank under the terms of the P&A. Other assets of the failed institution may be subject to an exclusive purchase option by theassuming institution for a period of 30, 60, or 90 days after the bank or thrift closing.
Some categories of assets
pass to the acquirer in a P&A; they remain with the receiver. Theseinclude claims against former directors and officers, claims under bankers blanket bonds and directorand officer insurance policies, prepaid assessments, and tax receivables. Subsidiaries and owned realestate (except institution premises) pass infrequently to the acquirer in P&A transactions.Additionally, a standard P&A provision allows the assuming institution to require the receiver torepurchase any acquired loan that has forged or stolen instruments.Before the banking crisis of the 1980s, the price paid by the assuming institution for assets other thancash was based on the value at which the assets were shown on the failing institution’s books.Because asset values are generally overstated in a failing bank or thrift, the FDIC’s ability to sell
Repurchase agreements, also known as “repos,” are agreements between a seller and a buyer whereby the seller agreesto repurchase securities, usually of U.S. Government securities, at an agreed upon price and, usually, at a stated time. Whena bank uses a repo as a short-term investment, it borrows money from an investor, typically a corporation with excess cash,to finance its inventory using the securities as collateral. Repos may have a fixed maturity date or may be “open,” meaningthat they are callable at any time.
These assets include premises owned by the failed institution, some categories of loans, rights to an assignment of leasesfor leased premises, data processing equipment, and other contractual services.