As we head into autumn, many of us change our seasonal wardrobes, replace the filters in our home heating/cooling systems, swap our summer screens for winter’s storm windows and ready our vehicles for winter. Bankers participating in a Federal Deposit Insurance Corporation (FDIC) shared-loss program should consider adding one more seasonal item to their list—a check-up on the status of your shared-loss participation, particularly your commercial shared-loss program. Many banks acquired assets and deposit accounts of failed institutions in the years following the Great Recession via purchase and assumption agreements entered into with the FDIC. Those agreements included an eight-year commercial shared-loss component, whereby the acquiring bank shares losses with the FDIC during the first five years and then shares recoveries for the remaining three years of the term.
It may be worthwhile to review shared-loss programs on a regular basis and prepare for their changing seasons in addition to staying apprised of the FDIC’s changing regulatory guidance and tenor as these programs mature. Earlier this year, the FDIC’s Risk Sharing Asset Management (RSAM) group issued RSAM Guidance 2016-G001 for those acquiring institutions entering or in the recovery reporting period for commercial shared-loss agreements. This guidance may have been issued after senior management last focused on the commercial shared-loss program and could catch some by surprise who are near the conclusion of their shared loss period and preparing to enter the recovery period.
Early termination is an intriguing and potentially viable legal option for certain acquiring institutions who no longer wish to incur the administrative costs of participating in a highly regulated, intricate program, especially as they move from the FDIC sharing in losses to the FDIC taking a portion of the acquiring institution’s recoveries. Many acquiring institutions have faced challenges in dealing with the RSAM group and feel pressure to leave potential revenue for their institution on the table because the process is complex.
While the changing of the seasons cannot be stopped any more than the coming change in shared-loss programs from the shared-loss to recovery period, acquiring institutions may want to prepare for the changes ahead so that the next season can be as well-managed and lucrative as possible.