The Federal Deposit Insurance Corp. is considering expanding the use of loss-sharing asset sales to nonbank institutions to get better prices when closing a bank, according to a Bloomberg story using unnamed sources.
Behind the idea is the desire to increase the number of organizations that could potentially bid for assets from a closed bank. The FDIC cannot sell a closed bank to a nonbank.
Apparently sparking the conversations in part has been public criticism from Jonathan McKernan, a Republican who joined the FDIC’s board of directors at the start of 2023. He has been vocal about shortcomings he perceives in the agency, including the need to get better prices in failed-bank auctions.
In a public statement through the FDIC, McKernan recently said that “bank failures are inevitable in a dynamic and innovative financial system” and that the country ” should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses.”
He was more direct and harsher last month when he said, “If we leave value on the table, that increases the loss to the FDIC’s deposit-insurance fund, which then means larger deposit-insurance assessments and ultimately increased costs for bank customers. We should be looking at ways to actively involve potential bidders of all types, including bidders from outside the banking system,” according to a Bloomberg story.
The move may also be part of the FDIC’s ongoing reconsiderations about how to undertake its mission given the spate of bank failures that have recently happened. For example, a report called Options for Deposit Insurance Reform, in the wake of bailing out depositors in two of the recent bank closings, mentioned how deposit insurance can affect competition across types of financial institutions.
“Deposit insurance can affect competition between banks, competition between banks and nonbank financials, and competition between deposits and other financial assets,” read the report. “Changes to deposit insurance may alter the competition between banks and financial assets viewed as substitutes. An increase in deposit insurance coverage would likely make deposits more competitive, decreasing the demand for alternative assets at least to some degree.”
