US Banking System: Bank Failure Resolution In The US

Bank Failure Resolution in the US

The United States Banking System is a critical component of the nation economy, providing essential financial services to consumers and businesses. However , there are times when bank fails , often with significant consequences for depositors, stakeholders and the broader financial system.
In these situation , it is crucial to have a robust and effective process in place to resolve failed banks and mitigate the impact on the wider economy.

The primary authority responsible for bank failure resolution in the US is the Federal Deposit Insurance Corporation (FDIC). Established in 1933 in the aftermath of the Great Depression, the FDIC's primary mission is to maintain stability and public confidence in the nation's banking system. When a bank fails, the FDIC steps in to protect insured depositors and facilitate an orderly resolution of the failed institution.


The FDIC's bank failure resolution process typically involves one of three options: a purchase and assumption (P&A) transaction, a deposit payoff, or a deposit insurance payout.

1. Purchase and Assumption (P&A)

Transactions In a P&A transaction, a healthy bank (the "assuming bank") purchases some or all of the assets and assumes some or all of the liabilities of the failed bank. This is often the preferred resolution method as it allows for the seamless continuation of banking services for depositors and minimizes disruption to the local community.

The FDIC will solicit bids from other banks interested in acquiring the failed institution's assets and liabilities. The bidding process aims to maximize the return on the failed bank's assets and minimize the cost to the Deposit Insurance Fund (DIF), which is funded by premiums paid by insured banks.

Once a suitable assuming bank is identified, the FDIC will facilitate the transfer of the failed bank's deposits and other liabilities to the new institution. Depositors of the failed bank automatically become customers of the assuming bank, and their accounts are typically available for immediate access on the next business day.

2. Deposit Payoff

In a deposit payoff, the FDIC pays out the insured deposits of the failed bank directly to depositors. This option is typically used when the FDIC is unable to find an assuming bank willing to take on the failed institution's liabilities.

In this scenario, the FDIC will first attempt to broker a P&A transaction. If that is not possible, the agency will proceed with a deposit payoff, ensuring that insured depositors (those with accounts up to the current FDIC insurance limit of $250,000 per depositor, per insured bank) receive their funds promptly.

The FDIC will then liquidate the failed bank's assets, using the proceeds to reimburse the DIF for the insured deposits paid out. Any remaining funds are distributed to uninsured depositors and other creditors of the failed institution.

3. Deposit Insurance Payout

In rare cases, the FDIC may determine that a deposit insurance payout is the most appropriate resolution method. This occurs when the cost of a P&A transaction or deposit payoff would exceed the estimated cost of directly paying out insured deposits.

In a deposit insurance payout, the FDIC will issue checks or electronic payments directly to insured depositors, providing them with immediate access to their insured funds. The agency will then work to recover as much value as possible from the failed bank's assets to replenish the DIF.

It is important to note that the FDIC's bank failure resolution process is designed to protect insured depositors, not uninsured depositors or other creditors of the failed institution. Uninsured depositors and creditors may suffer losses, depending on the financial condition of the failed bank and the proceeds from the asset liquidation process.

The FDIC's ability to effectively resolve failed banks has been tested during periods of economic stress, such as the 2008 financial crisis and the COVID-19 pandemic. During these challenging times, the agency has demonstrated its capacity to swiftly and efficiently manage bank failures, minimizing disruptions to the broader financial system and protecting insured depositors.

However, the resolution of large, complex financial institutions, often referred to as "too big to fail" banks, presents unique challenges. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced new tools and requirements to address the resolution of these systemically important financial institutions (SIFIs), including the development of "living wills" and the establishment of the Orderly Liquidation Authority (OLA).

The OLA provides the FDIC with the authority to resolve a SIFI in an orderly manner, ensuring that the firm's critical operations are maintained while imposing losses on shareholders and certain creditors. This framework aims to mitigate the systemic risk posed by the failure of a large, interconnected financial institution and prevent the need for taxpayer-funded bailouts. There is also the FDIC Problem Bank List


As the financial landscape continues to evolve, the FDIC's role in bank failure resolution remains crucial. The agency must stay vigilant, adapt its strategies, and work closely with other regulatory bodies to ensure the stability and resilience of the US banking system. By doing so, the FDIC can help protect depositors, maintain public trust, and contribute to the overall economic well-being of the nation.