What is an Advance Dividend?
Advance dividend is an estimate of the present value of an asset being liquidated that is used to provide an immediate dividend to uninsured depositors. An advance dividend is designed to help uninsured deposits in addition to the amount insured by government regulators.
How an Advance Dividend Works
Advance dividends are part of the work of the Federal Deposit Insurance Corporation (FDIC). When a financial institution fails, the FDIC steps in and takes over bank operations. The agency appoints staff to examine the bank’s assets and to determine how much those assets should be worth. The FDIC also uses asset managers to help liquidate those assets by selling them to other financial institutions. The goal of the FDIC is to get through the process as quickly as possible in order to maintain consumer confidence in the financial system, and to ensure that the negative impacts of a failed bank on the economy are as limited as possible.
The FDIC was faced with a large number of bank failures during the 1980s. Savings and loans were struggling to stay open, and depositors and creditors were likely to suffer if the financial institution’s assets were liquidated. This was a significant problem, especially since many of the depositors were unsophisticated in financial matters. Rather than risk depositors not being paid back for years as the liquidation process progressed, regulators sought to provide money to the depositors as quickly as possible in the form of advance dividends. This helped the local economy by providing depositors with funds to spend.
How The Advance Dividend Process Works
The amount of an advance dividend represents the FDIC’s conservative estimate of the ultimate value of the receivership. Cash dividends are equivalent to the advance dividend percentage, which includes the total outstanding deposit claims. Advance dividends are paid to uninsured depositors, thereby giving them an immediate return of a portion of their uninsured deposit.
The process of determining the advance dividend starts as soon as a bank closes. The FDIC first starts selling off the bank’s assets to other financial institutions. Nonperforming assets are then reviewed by FDIC staff, who estimate how much money the FDIC would eventually be able to collect, with the knowledge that the value of all assets would not be fully recovered. If the staff underestimates, and the FDIC is able to collect more than anticipated, then the FDIC pays depositors a dividend as soon as this is realized. If the staff overestimates how much would be collected, the FDIC absorbs the loss.