What Is an Advance Dividend?
An advance dividend is a payment to uninsured depositors in the event of a bank or thrift failure. When a financial institution becomes insolvent, the Federal Deposit Insurance Corporation (FDIC) steps in as the insurer of the bank's deposits and the receiver of its assets. The FDIC then pays out in full for insured deposits and pays an advance dividend on uninsured deposits based on the estimated value of the remaining assets. This is designed to ensure that uninsured depositors receive immediate payment on at least a portion of their deposits.
An advance dividend may also refer to an interim dividend, issued to a corporation's shareholders in advance of their annual financial statements. This practice is particularly common in the United Kingdom, where some companies pay dividends on a semiannual basis.
- An advance dividend is a payment to uninsured depositors in the event of a bank or thrift failure.
- When a financial institution fails, the Federal Deposit Insurance Corporation (FDIC) takes over and makes a conservative estimate of the value of the institution's assets. This estimate is used as the basis of the advance dividend.
- If there are enough assets to cover all depositor claims, there may also be an advance dividend for unsecured creditors.
- An advance dividend can also refer to an interim dividend, particularly in the United Kingdom. This is a dividend paid out to corporate shareholders before the company completes its annual financial statement.
Understanding Advance Dividends
Advance dividends are part of the work of the Federal Deposit Insurance Corporation (FDIC). When a financial institution closes, the FDIC steps in and takes over its operations and assets. In most cases, these obligations are transferred to a healthy bank in a purchase and assumption transaction. Otherwise, the FDIC repays these obligations with the liquidated assets of the defaulting bank.
Since individual accounts are fully insured up to $250,000, these deposits can be paid out in full, usually within a few days. Uninsured depositors and creditors are paid out from the institution's remaining assets.
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 maintain consumer confidence and limit the negative impacts of the failed bank.
The financial system was faced with a large number of bank failures during the 1980s. Savings and loans struggled to stay open, and depositors and creditors suffered from illiquidity while waiting for their claims to be resolved.
This was a significant problem, especially since many of the depositors were unsophisticated in financial matters. Rather than let depositors wait for years as the liquidation process progressed, regulators sought to provide a portion of those deposits as quickly as possible in the form of advance dividends. This helped the local economy by reducing the depositors' liquidity risk.
An advance dividend is based on a conservative estimate of the value of a bank's assets. If there is money left after the assets are liquidated, claimants can receive further payment, up to the par value of their deposits.
How the Advance Dividend Process Works
The amount of an advance dividend represents the FDIC’s conservative estimate of the ultimate value of the assets in federal receivership. Advance dividends are paid to uninsured depositors, thereby giving them an immediate return of at least a portion of their deposits. If there are remaining assets, they can also provide a dividend to the bank's unsecured creditors.
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. This estimate is used to determine the size of the advance dividends.
If the staff underestimates the value of these assets, then the FDIC can pay claimants a further dividend up to the par value of their uninsured deposits. If the staff overestimates the value of the assets, the FDIC absorbs the loss.
Other Meanings of Advance Dividend
In certain circumstances, an advance dividend may be used interchangeably with an interim dividend. This is a payment made to a corporation's shareholders, before the company's annual general meeting and final financial statements. Interim dividends are issued more frequently in the United Kingdom, where it is common for dividends to be paid on a semiannual basis.