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Although purchase and assumption transactions are the most common resolution method, deposit
payoffs are used when no acquiring institution can be found. When a bank or thrift is closed by its
chartering authority, the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity as
deposit insurer makes sure that customers receive the full amount of their insured deposits.
Customers with uninsured deposits and other general creditors of the failed institution are given
receivership certificates that represent their uninsured claims that will be held against the failed
institution's estate. In a deposit payoff, because there is no acquiring institution, the FDIC as receiver
must liquidate all of the failed institution's assets.
Structure of a Deposit Payoff
Deposit payoffs currently have two forms: the straight deposit payoff1 and the insured deposit
transfer. A third form, the Deposit Insurance National Bank (DINB),2 is rarely used and has not been
used since 1982. (see part 1 of my FDIC blog posts for more info on this!!)
In a straight deposit payoff, the FDIC determines the insured amount due each depositor and
prepares a check for that amount. Arrangements are made either for the depositors to come to the
bank and get the checks or for the FDIC to mail the checks to the depositors. Again if your read my earlier posts, this is done in an orderly, methodical method---NOT when you demand it!!
In an insured deposit transfer, the FDIC also determines the insured amount due each depositor.
Arrangements are then made with a healthy institution that is willing to act as agent for the FDIC and
to pay insured deposits to customers of the failed institution. The FDIC transfers insured deposit
accounts and secured liabilities of the failed bank or thrift, along with an equal amount of cash or
other assets, to the healthy institution. Service to customers with insured deposits is uninterrupted.
Note, if you listen to CNBC, you are aware that within the last few months, depositor have had to wait for their money up 2-weeks to 1-month....and we have not seen the worst of it!!
Each of these transactions is discussed on the following pages.
Straight Deposit Payoff
The straight deposit payoff method is generally the most costly method of resolution, because the
receiver must liquidate all of the failed institution's assets, bear the cost of paying off all the
customers with insured deposits, and monitor the estate for the creditors.
A straight deposit payoff is only executed if the FDIC does not receive a bid for a P&A transaction
or for an insured deposit transfer transaction that will result in a lower cost than the payoff method
1 A straight deposit payoff is frequently referred to simply as a "payoff," since it is the only time the FDIC actually prepares
checks for failed institution customers with insured deposits. (on their time schedule NOT YOURS)
2 The Banking Act of 1933 authorized the FDIC to establish a Deposit Insurance National Bank to assume the insured
deposits of a failed bank. A DINB had a limited life of two years and continued to insure deposits still in the bank, but could not make loans. Depositors were given up to two years to move their deposit accounts to other institutions.
42 (Deposit Payoffs)
(as discussed in Chapter 2, The Resolutions Process). In a straight deposit payoff, no liabilities are
assumed and no assets are purchased by another institution. The FDIC must pay depositors of the
failed institution the total of their insured deposits. (on their time schedule NOT YOURS)
In a straight deposit payoff, the FDIC determines the insured amount for each depositor and pays that
amount to him or her. In the past, the bank customers would come to the bank to receive their
checks from the FDIC. More recently, because of the size of some failed institutions and the
geographic dispersion of their customer bases, the FDIC has paid insured deposits by mailing
customers checks equal to the amount of their insured deposits. In calculating each customer's total
deposit amount, the FDIC includes all the interest accrued up to the date of failure under the
contractual terms of the depositor's account. In other words, the FDIC pays the entire principal plus
all accrued interest, up to the insurance limit. (on their time schedule NOT YOURS)
For example, a customer with only one individual account, a certificate of deposit in the amount of
$80,000 with $15,000 in accrued interest ($95,000 total), would be paid the full $95,000. A
customer with only one individual account, a certificate of deposit in the amount of $90,000 with
$15,000 in accrued interest ($105,000 total), would be paid only $100,000 because of the insurance
Any checks which a failed institution's customer has written but which have not yet "cleared" the
customer's checking account are returned to the payee (person to whom the check was written),
because there is no succeeding bank to pay the check. These checks are stamped "Bank Closed"
before they are returned to the payee and are not considered "insufficient funds checks." Even so,
this situation causes some disruption to the customers of the failed institution.
The deposit liabilities (both insured and uninsured deposits), together with all other liabilities of the
failed bank or thrift, represent claims against the receivership estate. The FDIC as receiver retains
all assets and liabilities and liquidates the assets of the failed institution for the benefit of all claimants
entitled to payment from the estate.
In the United States, laws provide that all depositors are paid from the receivership estate before any
general creditors (such as, suppliers, trades people, or contractors) or other unsecured creditors. The
FDIC in its corporate capacity pays the customers with insured deposits up to the insurance limit.
These customers actually exchange their claims against the receivership estate for the insurance
payments from the FDIC in its corporate capacity, so that the FDIC in its corporate capacity is
substituted as the claimant for the amount of insurance payments made. This process is called
"subrogation," and the FDIC is the "subrogee." Therefore, claimants against the receivership estate
include the FDIC in its corporate capacity as the payer of deposits.
For example, a customer with one individual account, a certificate of deposit in the amount of
$80,000 with $15,000 in accrued interest, would be owed $95,000 by the receivership estate. If that
customer accepted $95,000 in cash from the FDIC in its corporate capacity, then the customer was
paid the full amount due to him. The customer "subrogated" his claim to the FDIC. The customer
43 (Deposit Payoffs)
now has no claim against the receivership estate; instead, the FDIC in its corporate capacity now has
the $95,000 claim.
Deposit payoffs occur more often in smaller banks rather than in large banks. Prior to 1982, the
largest bank failure handled through a straight deposit payoff was the $78.9 million Sharpstown State
Bank, Houston, Texas, in 1971.3 On July 5, 1982, Penn Square Bank, N.A. (Penn Square),
Oklahoma City, Oklahoma, which had $516.8 million in total assets, failed. Penn Square, with $470.4
million in deposits in 24,534 deposit accounts, was handled as a DINB. The largest straight deposit
payoff since 1982 was for Independence Bank, Los Angeles, California, which failed January 30,
1992. Independence Bank, which had $564.2 million in total assets, had $503.4 million in deposits
in 33,677 accounts. The largest straight deposit payoff handled by the Resolution Trust Corporation
was Brookside Federal Savings & Loan Association (Brookside), Los Angeles, California, which
failed November 16, 1990. Brookside had total assets of $450.1 million and total deposits of $416
million in 15,414 accounts.
From 1980 through 1994, the FDIC managed 120 straight deposit payoffs out of a total of 1,617
failed and assisted banks, or 7.4 percent of all closings. Chart 4-1 shows the distribution of straight
deposit payoff transactions per year from 1980 through 1994, and exhibit 4-1 shows the benefits and
other considerations of straight deposit payoffs.
3 Irvine H. Sprague, Bailout (New York: Basic Books, Inc., 1986), 117.
44 (Deposit Payoffs)
Straight Deposit Payoffs
Compared to All Bank Failures and Assistance Transactions
Straight Deposit Payoffs
¨ Customers with insured deposits receive money quickly without having to wait
for proceeds from the liquidation of receivership assets.
¨ Customers must find a new bank and set up new accounts.
¨ Customers with uninsured deposits are not paid the uninsured amount.
¨ Customers experience a loss of service, including the return to payees of
checks that had not cleared the customers' accounts.
¨ Customers lose interest on funds from the date of failure until the FDIC check
is deposited in an account elsewhere.
¨ Community can experience economic disruption from the loss of an institution.
¨ Receivership bears the cost of liquidating all of the assets of the estate
¨ Usually considered a "last resort" resolution method due to its high cost to the
Jane Herron is the Success Energizer at Training Without The Travel dot com.
As a 25 year veteran with National Speaker's Association, Jane has been a longtime corporate trainer, productivity coach and professional speaker working in all 50-US states and 10-countries.
And she is also a Realtor in Utah selling a fantastic home at the mouth of Little Cottonwood Canyon.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.